30 August 2002
Thinking on economic policy in the ANC has been influenced by the political positions of the movement developed over many decades of struggle. The Freedom Charter stands out as the most comprehensive expression of the ideals of the movement. A number of the core ideas have been through various stages of development.
Each of the National Conferences at Morogoro (1960), at Kabwe (1985), in Durban (1991), and in Bloemfontein (1994), have added to these particular ideas. In addition, special policy initiatives such as the Ready to Govern conference (May 1992) and the drafting of the Reconstruction and Development Programme (February 1993) greatly expanded the scope and detail of economic policy. The National Executive Committee has also discussed and directed economic policy implementation from time to time. It is essential that we affirm the purpose of the policy review process we now embark upon.
We must recognise that this policy review takes place under the broad rubric of ‘Continuity and Change’. This means that we must take as a starting point the existing policy positions adopted by the 50th National Conference (Mafikeng, December 1997) and reviewed by the National General Council (Port Elizabeth, July 2000). Our basic policy positions have always reflected our unswerving commitment to the vision of a united, democratic, non-racial, non-sexist and prosperous South Africa. These objectives will not be realised overnight since their achievement requires a fundamental transformation of our country.
Moreover, we must recognise the dialectical relationship between the policy centre, namely the ANC Conference, and the implementing agency, the ANC in government. Since the elections, and the formation of a democratic ANC-led government, we have started implementing the policy framework. We must learn from this experience. Furthermore, we must recognise the dialectical relationship between the ANC in government, and the mass based liberation movement that we continue to lead. Mass mobilisation, in other words is an essential component of our programmes for economic transformation and we also must learn from our successes and failures in these areas.
- To support the policy review process, this document outlines our progress in fulfilling the resolutions of the 50th National Conference in Mafikeng. It starts with a general overview of economic developments and policies since the ANC took power in 1994. It examines the economy inherited by the ANC in 1994 and progress since then with an emphasis on what has been achieved since the Mafikeng National Conference in 1997. On the basis of this review some of the current challenges and debates are discussed. This review and discussion forms the background for the formulation of resolutions by branches for the 51st National Conference later this year.
Overall economic strategy
The crisis of the apartheid economy
In 1994, the ANC inherited an economy that was in long-term decline and was massively distorted by apartheid’s political and economic policies. Although South Africa’s per capita Gross Domestic Product ranked it as a middle-income country, living standards for the majority resembled those of much poorer countries. Levels of malnutrition, homelessness, and illiteracy in South Africa were closer to those of less-developed countries. Massive inequalities in incomes, wealth and skills characterised the economy. These inequalities existed between race groups, between men and women, and between rural and urban areas. A range of studies showed that South Africa ranked amongst the most unequal economies in the world. The black majority had effectively been excluded from economic ownership and control fundamentally undermining black people’s ability to accumulate capital.
The economy was in long-term decline and faced the threat of deindustrialisation. This stagnation was associated with:
- A slump in gold mining, historically the mainstay of the economy.
- Depressed domestic and foreign investment, especially since 1985.
- Distorted markets for factors of production and distorted patterns of domestic demand.
- Weak competition laws and high levels of protection for domestic enterprises.
- An extremely hostile environment for new entrants, black-owned enterprises and small businesses.
- Rapidly rising unemployment and little formal employment creation.
- Little beneficiation or value-addition to primary products
In terms of macroeconomic policy, there were worries about the deficit, which was approaching 8 per cent of the GDP at the time. Inflation was over 10 per cent, despite periods of very high interest rates. There was a danger that a new government could fall into a ‘debt trap’ and that interest payments on government debt would reach unsustainable levels and comprise an ever-increasing proportion of government expenditure.
Investment in both the public and private sectors had stagnated for nearly a decade prior to 1992. This was due to high cost structures and the resultant inability to expand either the domestic or export markets. The high cost structures were mainly due to short production runs, relatively high tariffs, stagnating managerial practice, poor human resources development, and poor work process methods.
Domestic demand was stagnant as a result of severe wealth inequality, stagnant real incomes (inflation was historically high despite low growth) and rising unemployment. The government of the mid – 1980s to 1993 had vainly tried to address social problems by generating a dangerously high fiscal deficit. Public corporations were overburdened with debt, generally required subsidies from government and were badly managed. In an attempt to compensate for a lack of competitiveness in manufacturing exports, a grossly expensive and ineffecient incentive scheme (GEIS) was introduced.
This combination of factors was not only the cause of a structurally stagnant economy, but also rendered the economy particularly vulnerable to the profound changes in the world economy, because there was a fundamental mismatch between developments in the South African economy and changes in the global economy. The changes in cost structures in industry in other economies – both developed and developing – were very dynamic and in manufacturing the cost structures were declining in relative and often absolute terms. The gap was therefore growing rapidly between costs of production in SA and competing economies.
The aparthied labour relations regime was not suited to a modern economy. Workplace relations between management and workers were extremely antagonistic resulting in high levels of strike action, and low productivity. Generally, workers enjoyed few rights and little protection from labour law despite reforms to the labour regime in the 1980s and early 1990s. This was particularly the case in sectors where collective bargaining structures were weak or absent.
In short the economy was not competitive in the world economy. Furthermore, deep-seated structural problems, such as very large income inequalities (in both absolute and relative terms), constrained the ability of the economy to grow and develop. Against this backdrop the economy was incapable of financing the required level of social expenditure over time in a sustainable manner.
In line with the ANC’s mission to fundamentally transform the South African economy, various policies were introduced from 1994 onwards. These included cross-cutting policies and sector-specific policies, and addressed both the macroeconomic position of the country as well as microeconomic constraints to growth.
In 1997, the ANC reflected on these policies and the progress that had been achieved. Economic policy objectives were reaffirmed and specific policy themes were emphasised in the resolutions adopted by the NGC. These resolutions were translated into government programmes and were, to a large extent, subsequently implemented. (See Part Two of this document for a more detailed review of progress in implementing the Mafikeng resolutions).
Implementation: Progress since 1994 16 Ahead of the 51st National Conference, it is important to once again reflect on progress made in transforming our economy since 1994.
The economy has grown since 1994. Although the growth rate has been slow, averaging 2% since 1994, a consistent increase in GDP is significant in the context of several external economic shocks that impacted severely on other developing economies such as the Asian financial crisis and the recession in the US and other major markets. Unfortunately, the rate of growth in GDP has not been sufficient to increase per capita GDP or living standards.
Investment rose from 15 per cent of GDP in 1993 to 17 per cent in 1998, and then fell to around 15 per cent in 2001. While it was higher than before 1994 for most of the period, it remained far below the 20 to 25 per cent required for rapid economic growth. Foreign investment gained ground rapidly until the late 1990s. Portfolio investment fluctuated, but climbed from virtually nothing to R83 billion in 1999. It then plummeted to R12 billion -presumably one factor behind the decline in overall investment. The reasons for the drop remain unclear. Foreign direct investment averaged around R10 billion a year in 1997-2000. Again, this contrasted with a virtual drought of foreign direct investment in the early 1990s.
Exports of manufactured goods, including refined minerals, have grown very rapidly indeed. Exports of transport equipment, tobacco, wood products and clothing have grown fastest, at between 10 and 29 per cent a year in the past five years. Refined metals, mostly iron and steel, still provide the bulk of exports. But automobiles and parts have tripled in size since 1996, to around a fifth of the total. In 1997 South Africa exported around 10 000 cars; the figure multiplied nine times by 2001. Exports of components increased from R4 billion in 1996 to R12 billion in 2000.
Our fiscal policy has achieved substantial cuts in tax rates and a major decline in the budget deficit. These achievements stabilised the macroeconomic balances of the economy, although they did mean that government spending declined in the late 1990s in real terms. >From 2001, we have seen a substantially increased spending on infrastructure, the social services and defence. This was possible in the context of lower government debt payments, lower interest rates and reduced public debt.
Inflation fell quite steadily from 1994, falling below 4 per cent in 2001. This decline was in line with international trends. The Reserve Bank responded with a significant cut in interest rates. 2002 saw an increase in inflation because of the depreciation of the rand and increased food prices. In response, the Reserve Bank has again raised interest rates, although they remain far below their peaks in the late 1990s, when the prime rate rose above 20 per cent.
In terms of labour relations, strike days fell by around half in 1994. Although they increased again gradually from the late 1990s, they remain far below the levels of the early 1990s. Average wage increases have slowed from 4 to 5 per cent above inflation to 1 to 2 per cent above inflation. In addition, the labour force has become substantially better educated. Some 72 per cent of people aged 15 to 35 have some secondary school, compared to around 51 per cent for those over 35.
The level of unemployment has not dropped. The economy is creating new jobs but not quickly enough to absorb new entrants to the labour market. In addition, most new employment creation in the formal sector is for highly-skilled labour.. There are indications that jobs are being created in the informal sector. The quality of these jobs, in terms of wage levels and job security, is often below that of formal sector employment. According to the 2000 Labour Force Survey, 62 per cent of informal jobs paid less than R500 a month, compared to 11 per cent of formal positions. There is thus a structural unemployment problem in the labour market.
Basic services – especially housing, electricity, water and telecommunications – have been extended to many more poor households and communities. Unfortunately, they cannot always afford to maintain the new infrastructure. The affordability of services needs to be examined. Services whose prices are determined/ administered by government must be further scrutinised. Improved poverty programmes have also helped relieve the burden of unemployment and higher prices on basic services. Free basic water and the child grant are major new measures, although their rollout is still incomplete. An integrated approach to food security to ensure the food security of households in the context of a liberalised agricultural sector is being implemented.
Poverty and inequality levels are being reduced through a range of instruments including the rollout of basic household infrastructure and services mentioned above, as well as specific projects such as community based public works programmes and the redistributive character of the Budget. More is required before significant improvements in the overall distribution of wealth and income will be achieved.
- In general, the apartheid economy that we inherited was characterised by reliance on mineral exports, domination by a few white-owned monopolies, high tariff barriers, declining levels of employment, racially entrenched skills divisions and an ineffective public sector. The democratic government has broken with this pattern in key areas, opening the door to diversification of exports, lower tariffs, broader access to skills and a more efficient and effective state structure. We must not underestimate the importance of these achievements. Still, while the platform has been laid, much more work must be done to improve the lives of our people. We need more focused efforts to create employment, increase economic opportunities for the mass of black people, and improve the lives of the poor.
Impact of our policies
The fundamental question that we must answer is whether or not the implementation of key economic strategies in the past seven years has translated into a better life for all. In answering this question we must acknowledge the achievements that have been made as well as the stark economic realities that still confront many of the people of South Africa.
The 50th National Conference in 1997 affirmed the following economic policy objectives:
- A competitive, fast growing and developing economy that creates sufficient jobs for all those seeking work.
- A redistribution of wealth, income and opportunities in favour of the poor and the historically disadvantaged.
- A society in which sound health, education and other services are available to all.
- An environment in which homes are secure and places of work are productive.
- The popular involvement and participation of all South Africans in the economy and in economic decisions.
The Mafikeng Conference also emphasised four critical areas of work for transforming the economy:
- the promotion of investment for sustainable jobs
- the continuous link between growth and development
- the establishment of new social and economic relations that empower the black community in general and African people in particular
- the integration of all components of the economy – urban and rural; women, youth and families – into sustainable and meaningful economic activity.
In this context, Conference emphasised the need for rural development and the improvement of the position of women. More specifically, the Mafikeng resolution stressed that the Growth, Employment and Redistribution strategy adopted in 1996 – the GEAR – aims, not to replace the RDP, but to implement its commitment to macroeconomic stability. The conference endorsed the basic objective of macro-economic stability, and saw the GEAR as a basis for achieving it. Like other policies, however, the conference said the GEAR should be reviewed, monitored and adjusted through ANC and Alliance policy processes.
- Upon review of progress achieved since 1994, the ANC recognised that a coordinated package of sectoral policies and programmes underpinned by cross-cutting strategies were needed to effect economic transformation. The objectives set out required the interaction and integration of various sectoral policy initiatives, including fiscal and monetary policy; trade and industrial policy; liquid fuels and energy; mining and minerals; agriculture; fisheries; tourism; and science and technology. Cross-cutting policy programmes needed to effect economic transformation were an employment strategy, rural development, the restructuring of state-owned enterprises, and a national empowerment strategy
The Conference also pointed to the impact of trends in the global economy, within which South Africa is a small player, as well as resource limitations. It argued that globalisation brings important opportunities but also real dangers and constraints for the economy.
Micro Economic Reforms: Building on the Mafikeng resolutions, government adopted a combination of cross-cutting and sectoral policies in the form of an Integrated Economic Action Plan in 2001. This plan was reinforced in a Microeconomic Reform Strategy in 2002.
This plan built upon macroeconomic stability and the initial set of microeconomic policy reforms initiated after 1994. These initial reforms included agricultural and land reform, the introduction of a modern labour relations regime, a move away from expensive subsidies to firms, new competition policy, the establishment of institutions to support small enterprises, a comprehensive skills development framework, and a number of sector-specific strategies. In many cases, these microeconomic reforms were subject to consultation, and even negotiation, with capital and labour under the auspices of Nedlac.
In many cases these reforms were successful, however, they did not completely remove the constraints to accelerated levels of growth in the economy. Many of the constraints exist in both the developed and underdeveloped aspects of the economy. In the developed economy there are impediments to cost competitiveness such as the fees charged by certain state-owned enterprises impeding the efficiency of supply chains. In the underdeveloped economy there is a lack of basic infrastructure, especially roads and communications.
Impediments to cost competitiveness and job creation exist in the labour market as a result of a mismatch of labour demand and supply, the low levels of education and skills of the workforce, and the need for ongoing review of labour market regulation. There is also technological under-provision: per capita expenditure on IT is low compared to South Africa’s competitors, investment in research and development is low, public science and technology infrastructure is weak, and there are low levels of public science awareness. Further, there are low levels of integration in the manufacturing process contributing to insufficient value addition, and there is inadequate investment in equipment and machine tools, knowledge and training.
Government’s microeconomic reform strategy sets out to address these constraints in an integrated manner and to accelerate levels of growth, greater equity in our society, black economic empowerment, small business development, competitiveness of our enterprises, and a more equal geographic distribution of productive activity. There are three key elements to the strategy:
- Lowering costs of energy, telecommunications and transport
- Investing in the drivers of growth and competitiveness: infrastructure, technology, and human resource development, as well as improving access to finance.
- Implementing sectoral strategies to realise the potential of high-growth sectors in the economy, including agriculture and agro-processing, tourism, cultural industries, information and communication technology, mining, minerals and metals, chemicals and biotechnology, clothing and textile, automotive and transport.
Government has implemented the strategy. Progress has been recorded in all areas of the strategy, although after only 18-months it is difficult to assess the impact of the strategy on objectives. Progress has been made in the national electrification programme, the development of gas infrastructure and the restructuring of the electricity industry. The managed liberalisation of the telecommunications sector is underway opening up new opportunities for the historically disadvantaged. Investments have been made in rail, roads and ports infrastructure. The integrated human resource development strategy is being implemented and a new national strategy for research and development, as well as biotechnology, has been developed. Sectoral plans are also being implemented and are subject to ongoing review.
The Microeconomic Reform Strategy does not represent the totality of government’s economic transformation agenda. Rather it is an attempt to integrate those strategies and programmes critical to accelerating growth. A range of more specific strategies complement the Microeconomic Reform Strategy such as the strategic plan for agriculture, the integrated manufacturing strategy, and the tourism transformation plan. Also detailed strategies on access to finance, black economic empowerment, integrated approaches to small business development and an integrated employment strategy will complement the Microeconomic Reform Strategy. The Microeconomic Reform Strategy has been welcomed as a sign of greater policy consistency from government.
Impact on poverty: A critical challenge is to define how best to ensure that the benefits of our economic reforms reach the poor. In the long run, we can only end poverty through a process of shared economic growth, in which the growth path is reshaped to benefit all our people by creating economic opportunities on a mass scale.
In governing for the future, as opposed to the immediate short term, growth sits at the center of everything that can make a country better. With growth poverty decreases, with productive sector growth job creation occurs, when people have jobs they can pay for schooling, pay rates and taxes etc. It is the non-negotiable starting point for a better country and a sustainable future. We must move away from the belief that the country can be made better via direct fiscal transfer. It is more sustainable for every person to benefit from shared growth: an individual can benefit directly through getting a job, a pay rise, better profits, or an individual can benefit indirectly through better services and improved social security paid for by the increase in government revenues resulting from economic growth.
The notion of shared growth implies that the ANC, as a movement, and the ANC, as government, implements a deliberate strategy to ensure the growth is accelerated and also to ensure that the benefits of growth are indeed equitably shared. A process of economic reform or transformation typically requires a series of trade-offs between the various ‘winners’ and ‘losers’ of the reform measures in order to ensure that gains and losses from the reform measures are equitably shared. This process is necessary to ensure continued support for the transformation process.
The National Economic Development and Labour Council was established to oversee this process. Numerous agreements have been concluded between the state, capital and labour under the auspices of Nedlac. This was done in a piece-meal fashion and did not translate into an equitable share of the rewards (and pains) of economic reform. The state has often failed to extract trade-offs from either capital or labour for various initiatives.
Role of the state in the economy: As the most significant player in the economy and as the custodian of democratic values in society, the state has a key role to play in transforming the economy, improving levels of productivity, encouraging investment and broadening economic opportunities to the historically disadvantaged.
If the state doesn’t educate, prevent diseases and prevent crime; can any economic strategy succeed? The debates in the 1980s and early 1990s about whether South Africa needs a smaller state or a larger state provides an unhelpful start to a discussion on the role of the state in society. What is clear is that South Africa needs a more effective state. We need a state that knows what it should be doing, how to do it and to do it well. The delivery of basic services to the poor, reduction in crime levels, providing quality education, preventing the spread of diseases and safeguarding our hard-fought democratic rights are key economic imperatives for South Africa. Improvements in the capacity of the state are a critical element of an economic transformation strategy.
An effective state is not just about delivering services, it is also about developing the appropriate regulatory frameworks. These regulatory frameworks are part of the arsenal of the state to achieve its objectives. The aim of our regulatory framework must be to balance the need to allow markets to function as efficiently as possible with the need to protect consumers from unscrupulous operators.
More emphasis needs to be placed on the appropriate regulation of public utilities and the adoption of business plans by state-owned enterprises that support economic transformation. This is critical if the programme of restructuring of state-owned enterprises is to avoid the creation of private monopolies rather than the provision of efficient utilities.
Many agencies were established in the early years of our democracy to overcome capacity constraints in an untransformed state. These agencies have played an important function in expanding service delivery in new areas, for example, Ntsika’s delivery of non-financial support to small enterprises. Such agencies often provide very specialised services. The time has come for the mandates and performance of these agencies to be reviewed in order to assess what has worked well and what can be improved. Some agencies have suffered from ‘mandate-creep’, poor corporate governance and inefficiency. The management of agencies by the state needs to be given greater attention to ensure an alignment of the work of agencies and government strategies.
Accelerating growth and development: Growing the productive side of the economy is key to sustainable growth, job creation and the eradication of poverty in our country. The strategy needs to address three important economic challenges.
First, it needs to increase domestic supply and demand. Expanding the domestic capacity of the economy will result in expanded job opportunities, increase in the levels of disposable income and lead to higher levels of domestic demand. This can be done through anti-poverty measures, government spending on infrastructure and basic services, and strategies to create jobs and increase production of basic goods and services for the poor. More robust domestic demand should give local companies a more stable basis for engaging with the international economy.
Second, a robust domestic economy will provide the platform for our enterprises to meet competition from imports as well as expand production through selling to foreign markets. Our economy needs to generate sufficient foreign exchange to finance the imports we need in order to maintain the growth momentum. Therefore the competitive focus remains an important part of the strategy to overcome what is often referred to as the balance of payments constraint.
Third, we need to define more clearly the role of support for micro producers and very poor rural and urban communities. Most institutions and systems in both the public and private sector have proven ineffective in these environments. We need to define responsibilities, structures and resourcing to address these needs. For instance, how should parastatals decide between infrastructure demands from formal business and poor households?
In this context producing globally competitive enterprises becomes a key policy strategy. The changes that the economy has undergone over the last decade and the changes in the world economy place South Africa at an advantageous position. The macroeconomic reforms have improved the environment for investment in South Africa. Reforms to the trade and industrial structure of the economy have taken us away from the dominance of large resource-based conglomerates towards a broader, more outward looking focus. At the same time, the developments in IT, global trade, transport and telecommunications lay the basis for a fundamental shift in how the South African economy will develop. Most significantly, all the changes outlined above remove the bias towards big companies. Small-and medium-sized enterprises can thrive in an environment where ideas are developed and traded.
South Africa can combine its rich natural resources, its good infrastructure, its sound economic fundamentals and its people to expand the manufacturing and services sectors. The Accelerating Growth and Development paper presented at the Ekurhuleni meeting summarises an integrated approach towards creating globally competitive enterprises. Growing the productive side of the economy is important not simply from an export (and therefore balance of payments) point of view but also it is the key to stimulate the domestic economy. Financing economic activity requires much higher levels of savings and investment. In this context foreign investment will continue to play an important role. However, it is important to recognise that ultimately it is domestic investment and savings that will drive higher levels of economic activity. In this regard we should endorse the Ekurhuleni Declaration on investment.
Globalisation allows South Africa to engage with the rest of the world in a manner that boosts opportunities for trade, for investment and for technology transfer. However, globalisation has significant threats, that as a democratic state, we must be aware of. Globalisation has the ability to force countries into a race to the bottom. Competition for lower taxes and cheap labour drives wages down, drives multinationals to the next low wage tax haven and reduces the resources of the state to deliver on its mandate. Improving the human capital of a country is a key element of protecting the poor against the negative effects of globalisation. Adequate social assistance too is part of the package the developing countries need. We can reap significant benefits from globalisation but at the same time, skills development is one element that must be used to cushion against job losses.
However, the set of forces shaping the global economy is not static or apolitical. It is possible to shape these forces, mitigate against their deleterious effects or harness their positive potential. Since the 50th NGC our understanding of globalisation has advanced.
South Africa is well positioned in a number of global initiatives. These include the Summit on Financing for Development, the World Food Summit, and the upcoming WSSD. In addition, South Africa plays an important leadership role at the World Trade Organisation, the International Labour Organisation, and other multilateral fora.
Opportunities to shape the agenda on important matters such as the reform of financial flows and world trade, global public goods, labour standards, and sustainable development, need to be exploited to promote the interests of South Africa, Africa and the rest of the developing world. Multilateral systems and institutions need to be strengthened to reduce opportunities for unilateral action.
The success of the macroeconomic stabilisation strategy has opened up a greater set of policy options to address economic transformation. The state has earned credibility for reducing the budget deficit and improving fiscal management. Strategies for poverty alleviation and development can now be introduced that would have been negatively received a few years ago.
- The Policy making process: A clear policy-making process is required that clarifies the roles of the party, particularly branch structures, the ANC’s alliance partners, and the State. The management of the process is important to avoid mixed messages that impact negatively on confidence and certainty. Policy objectives need to be clearly articulated by the ANC to avoid varying interpretations at the implementation phase, as well as to avoid conflict between sectoral objectives and economy-wide objectives. There are inherent problems in assessing the impact of policies and this is exacerbated by the inadequate monitoring and evaluation systems in the measurable objectives, poorly defined outputs, the absence of appropriate performance indicators, as well as the lack of reliable data and statistics in some areas. Further, the ANC cannot rely on the monitoring and evaluation systems of the state. There is a need for independent assessment of the impact of the state’s programmes.
Review of progress – cross-cutting issues
This section of the report examines the progress that has been made since the Mafikeng General Conference in 1997.
Fiscal and Monetary policy: Fiscal policy determines the level of government borrowing and taxation as well as the allocation of resources between government functions. Monetary policy refers to policies on the value of the rand in terms of both inflation and foreign exchange rates, largely through the Reserve Bank’s stance on interest rates.
The emphasis of fiscal policy is on growing GDP, improving revenue recovery, and more effective expenditure in order to make more resources available for transformation. In the process of raising new funds, applying the ratios of the deficit, borrowing, and taxation to GDP will be taken into account.
The country has achieved macroeconomic stabilisation, characterised by an accelerated reduction in the budget deficit and sustainable reductions in the inflation rate and interest rates. Personal and corporate tax rates have been reduced. This stability has reduced the vulnerability of the economy to external shocks such as recent recession in many parts of the world and the depreciation of the currency. Consequently, the climate for investment has improved.
The scrapping of the ‘financial rand’ has contributed to a more competitive exchange rate. The introduction of inflation-targeting has also contributed to stability and transparency in monetary policy. In 2000, the Reserve Bank introduced a policy of inflation targeting, aiming to achieve 3 to 6 per cent inflation rate by 2003. This was a shift from the earlier policy, which did not set an explicit target but implicitly aimed to eliminate inflation altogether.
Government has ensured that a greater share of resources go to priorities areas like education, health and social welfare targeted to the poor. From around 2000, the decline in interest rates has reduced the cost of debt to the state. As a result, government has been able to expand spending on major services substantially, without changing the GEAR targets. Government has voiced a commitment to maintaining real growth in expenditure.
In the last two years, government has also greatly increased the funding available for infrastructure. A framework for public-private partnerships has been put into place to leverage additional resources for infrastructure investment.
Government has also introduced strong measures to improve financial management, notably through the Medium Term Expenditure Framework (MTEF) and the Public Finance Management Act (PFMA) and a similar bill on local government. The MTEF projects government spending for three years into the future. That lays the foundation for a longer-term approach to expenditure, which in turn should permit more systematic transformation programmes. The new legal framework sets clear parameters for government spending and establishes capacity building mechanisms. Within this framework, new regulations decentralise control over spending in order to improve flexibility and efficiency.
South Africa underwent a massive change in the budget process in the two years after 1994. On the one hand, there was a process of integrating the former homeland budgets and parallel administrations into a single national budget. On the other, almost immediately a process began of dividing the budget for health, education, welfare and a number of other functions between the provinces. This was undertaken through the allocation of lump sums to provinces, which in turn were expected to develop their own budgets. In itself, this process caused considerable dislocation and required huge management effort. This has also had implications for those policy areas that are concurrent responsibilities of provincial and national departments.
Restructuring of State-owned enterprises: The Mafikeng Conference argued that the restructuring of state-owned enterprises is an integral part of the transformation of the economy. The process has four aims:
- Enhancing sustainable growth, development and employment creation
- Increasing the rate of development of infrastructure to meet basic needs and strengthen economic potential
- Promoting the development of human resources
- Ensuring decisions on a case-by-case basis.
- Government has implemented ANC policy and has adopted a case-by-case approach to restructuring and restructuring decisions are made according to the following criteria:
- Be driven by economic and social needs of sectors;
- Ensure secure job creation where possible, and include safety nets for those workers who cannot secure continued employment or training;
- Ensure increased competition, which in turn would improve the efficiency and quality of services, subject to efficient regulation to prevent public monopolies being transferred to private monopolies and to secure affordability of services;
- Support BEE, including community trusts, employee ownership schemes;
- Improve the fiscal position, since the sale of assets would generate resources to reduce the national debt;
- Invoke the National Framework Agreement to refer restructuring issues between government and labour.
- On this basis, government has:
- Between 1994 and end 2001, conducted 18 restructuring initiatives that have included complete sales, partial equity sale involving BEE, strategic equity sale to foreign owners, management contracts, rationalisation of function across different SOEs, and nationalisation. Such initiatives have secured just over R20bn (out of a total of R26bn) that the national treasury has been able to allocate for social and other purposes.
- Ensured that the restructuring of Denel and Spoornet has been negotiated with full agreement and participation of labour. Ensured, further, that discussions with labour continue in the energy sector to finalise restructuring options.
- Established new state entities such as Arivia.com, Sasria, Khula, and Ntsika.
- Built strong community benefits into the restructuring of state forest holdings.
- Co-operated actively with Department of Labour around the issue of Social Pacts.
- Ensured that training, job retention, transfer of technology where relevant, and skills development, have been included in all negotiations.
- Strengthened Boards of Directors and agreed to Shareholder Compacts and Protocols on Corporate Governance as steps towards ensuring greater accountability of SOEs to the public.
A number of challenges remain. Among these is the continued monitoring and assessment of restructuring processes, some of which occur in environments that are subject to global market conditions and the needs of increased competitiveness of some sectors (e.g. ports). The coordination and implementation of Social Plan programmes is critical. The integration and impact of government’s social policies as far as these derive from inputs from state-owned enterprise require careful assessment and monitoring.
Government has indicated its commitment to continual assessment to ensure that each instance of restructuring of state-owned enterprise aligns with overall objectives. It also says regulatory frameworks will be strengthened to guide markets toward more desirable outcomes.
Rural development: The vision of the Integrated Sustainable Rural Development Programme (ISRDP) is “to attain socially cohesive and stable communities with viable institutions, sustainable economies and universal access to social amenities, able to attract skilled and knowledgeable people, equipped to contribute to their own and the nation’s growth and development.” It identifies four key areas – land reform, enhancing economic opportunities and promoting community ownership, access to finance, and investment in rural infrastructure.
Progress has been achieved in putting together the institutional and management arrangements necessary for the successful roll out of the ISRDP, including the appointment of political champions in each of the designated nodes. Projects worth R584m have been identified for implementation in 2002/03 financial years. All of the 13 nodes have completed their Integrated Development Plans (IDPs).
Science and Technology: The core vision of the White Paper on Science and Technology is a national system of innovation to harness the diverse aspects of science and technology through the various institutions where they are developed, practised or utilised. No government can order innovation to take place, but government can ensure that a competent pool of expertise from which innovation can spring is grown and maintained, and government can create an environment in which research and development can take place.
- Key steps include:
- Investment in skills levels at all levels, with improvements in mathematics, science and technology as a fundamental goal.
- Ensuring technology meets basic needs, with the Department of Arts, Culture, Science and Technology playing a co-ordinating role.
- Establishing the National Advisory Council on Innovation to advise the Minister of Arts, Culture, Science and Technology on the role and contribution of science, mathematics, innovation and technology, including indigenous technologies, in promoting and achieving national objectives.
- In addition, in 2002, government established the National Commission on Information Society and Development, which is constituted from representatives of South Africa’s public and private sectors. It also set up the Presidential International Task Force on Information Society and Development. The taskforce will comprise the heads of international corporations and experts in information and communication technology. The Department of Arts, Culture, Science and Technology has produced a Research and Development Strategy, which seeks to ensure the coordination between industrial policy and research and development policy.
- Across the world, in response to the increasing rates of knowledge production, dissemination and application, the shortening of product life cycles and the increasing competition for human resources, many countries are increasing their national investment in research and development (R&D). South African science and technology has made strides since Mafikeng. Big science projects such as the Southern African Large Telescope (SALT), which will give world-class infrastructure to African scientists, contrast with rapidly growing technology incubator programmes for small business. Regional systems of innovation (a feature of technically developed nations) have begun to emerge in Gauteng and in the Western Cape.
- A forward-looking orientation has been adopted to engage with new technologies (for example biotechnology and information and communication technologies). This poses a challenge to branches in terms of people’s ability to deepen their understanding of these technologies and exploit the opportunities they present for accelerated economic and social development.
Review of progress – Sectors
Agriculture: Since 1994, government policy has focused on establishing free markets in agriculture and redirecting government support (including Land Bank credit) to black farmers. This strategy is incorporated in a range of policies, beginning with the Broadening Access to Agriculture thrust, as well as the recent Strategic Plan for Agriculture that was developed with farmers’ associations. At the same time, government has sought to accelerate land reform, and the reform of state institutions responsible for farmer support programmes and other agricultural advisory services.
In line with this overall strategy, the control boards and other kinds of support given to commercial farmers under apartheid have been removed, and agricultural markets have been rapidly deregulated. At the same time, the dti has pushed for increased access for South African agricultural exports to foreign markets.
In part, the deregulated approach was justified by the argument (endorsed at Mafikeng) that household food security did not necessarily require national food self-sufficiency. Ensuring household food security is a complex issue and to this end an integrated food security strategy has been developed.
- Energy: Government policy on electricity has focused on limiting Eskom’s role in the industry, developing more rational tariffs, and establishing budgetary subsidies for electrification. Changes have included:
- Rationalising electricity distribution, which is currently run by local governments, into six Regional Electricity Distributors (REDs), which at least initially will be controlled and supported by the central government through an EDI Holding Company. This process aims to equalise resourcing for electrification and capacity for maintaining electricity distribution between municipalities.
- Setting up a new electrification agency which would be funded from the national budget, at around R1 billion a year. This replaced an earlier system where Eskom did not pay taxes, but funded electrification out of its retained earnings.
- Restructuring electricity supply in order to bring in private producers, both to open the door to black ownership and to establish competition with Eskom. Current proposals foresee privatising around 30 per cent of generation, with 10 per cent reserved for BEE. This approach arises from the belief that Eskom engages in monopoly pricing, although it still charges some of the lowest electricity prices in the world.
- Rationalisation of prices between regions, at least on paper, through the introduction of the Wholesale Electricity Pricing System (WEPS). Government argues that the reliance on local governments to set rates has led to confusion, with overcharging of the poor in some cases and effective subsidies to the rich. Initially it seemed that government would use this process to reduce the cross subsidisation of households by formal industry. It now says, however, that WEPS will only clarify real costs, and the cross subsidy will remain. The cross subsidy of households by industry reduces household electricity charges by between 20 and 50 per cent. Because formal industry uses 80 per cent of energy (mostly for mining and refineries), the cross subsidy only raised industrial electricity costs by around 5 per cent.
- In liquid fuels, government has focused on
- Establishing a more transparent pricing policy which is linked to world petroleum prices and the exchange rate
- Restructuring state-owned enterprise in the sector into a single company
- Ensuring an increase in black ownership.
Housing: The National Housing Framework (NHF) process, which culminated in the Housing White Paper, the Development Facilitation Act, the RDP, GEAR, the Housing Act, the Constitution and the Housing Code, established the core policy that drives the government’s housing programme. Its principles are: People-centred development and partnerships; Skills transfer and economic empowerment; Fairness and equity; Choice; Quality and affordability; Innovation; Transparency, accountability and monitoring and Sustainability and fiscal affordability
In 1997 government promulgated the Housing Act to provide a comprehensive regulatory framework for the effective delivery of housing for poor households in South Africa. Amongst others, the Act defined the roles and functions of the three spheres of government in housing delivery. It obliged the Minister of Housing to phase out the housing subsidies inherited from apartheid, which had essentially benefited a few privileged groups, and provided for a National Housing Code.
The Housing Amendment Bill of 2001 transferred the powers, duties, rights and obligations of Provincial Housing Development Boards to the MECs responsible for Housing. It also limited the sale of houses obtained through state subsidies. Finally, in 2002 the Housing Department introduced additional changes in policy aimed at improving provision for the poor. The new policy sought to ensure community mobilisation to support housing delivery, in part by requiring all recipients to contribute either work or funding to their state-subsidised housing.
Industrial and Trade Strategy: Market access opportunities have been secured through a range of bilateral trade agreements, and a developmental agenda has been adopted by the World Trade Organization (WTO) as a result of South Africa’s strategic engagement with countries of the South and leadership at the WTO. Trade with Africa has increased significantly and economic integration strengthened through the SADC free-trade agreement and the renegotiation of the SACU agreement.
With respect to creating more opportunities in domestic markets, a more equitable and efficient regulatory system has been introduced including new competition law, consumer protection, and the regulation of gambling. Regulators have also been established to protect the public interest in several economic sectors including telecommunications and energy.
Small business development legislation and a supporting institutional framework have been established to provide financial and non-financial support to entrepreneurs. Reforms to government procurement have opened up new opportunities for historically disadvantaged individuals. A more targeted approach to the needs of micro-entrepreneurs is being developed.
A range of supply-side support measures and incentives to promote investment, competitiveness, the adoption of new technologies, innovation, and production for export, has been put into place.
Investment promotion activities have included marketing campaigns, incentives, and specific state-led investment projects in spatial development initiatives, industrial development zones, as well as through the national industrial participation programme. The mandate of the Industrial Development Corporation was amended to promote transformation objectives.
Recently legislation has been drafted to provide for cooperatives to become legal entities and thus access various support measures for enterprises. Work with the Department of Agriculture and the DTI will continue to give effect to greater support measures to support cooperatives.
A number of sector strategies have been implemented. The most successful example of these is the motor industry development plan.
The Integrated Manufacturing Strategy seeks to take these achievements forward by focusing on the inter-linkages between economic sectors in order to identify areas for focused intervention by the state (at times acting in concert with the private sector). The strategy takes a more explicit approach to implementing sector strategies and a more active role for the state.
Land: The government’s land reform programme aims to:
- Deliver land for quality human settlement and economic use
- Promote environmental sustainability and the optimal use of the land and other resources
- Support economic growth through agriculture and non-agricultural means and promote the fundamental de-racialisation of the agricultural sector as part of the broader de-racialisation of the economic spectrum of inequality and access
- Uproot the brooding sense of injustice and establish a high moral ground in terms of eradicating poverty, rural development and urban renewal.
To carry out this programme, the government has established a strong legislative framework, including the Restitution of Land Rights Act of 1994, the Land Reform (Labour Tenants) Act of 1996, the Extension of Security of Tenure Act of 1997 and the Provision of Land and Assistance Act of 1998. The current land reform programme comprises land restitution and redistribution, and a tenure security programme.
The restitution programme aims to redress apartheid-colonial injustices of land dispossessions, which affected more than 3,5 million people from 1913. In these cases the government will restore land, provide equivalent holdings, or give financial compensation. The bulk of land restitution seems likely to benefit urban people who were expelled from their homes and businesses.
The redistribution programme seeks to improve the livelihoods of poor South Africans by providing land for housing, agricultural production and other types of production such as eco-tourism. In essence, the government provides a grant, the size of which depends on how much the beneficiary can contribute in kind, cash and/or labour. Although the grant initially provided for groups, more recently it has gone only to individuals.
Tenure reform defines the obligatory rights and duties between landlords and tenants. It seeks to establish the land rights of more than six million inhabitants who, for decades, have informally occupied land that they do not own, often by agreement with the landlord. These groups of people are vulnerable to eviction by the landlord. As a result, they live in a constant state of insecurity, and cannot develop and improve their land.
The land reform process initially relied heavily on complex procedures designed to ensure legality and consultation. To meet quantitative targets, it aimed to settle relatively large groups of beneficiaries on big pieces of land. This system led to long delays in the adjudication process
Starting in 1998, the process has been reformed so that settlements are now determined more by their ability to improve productivity. The Integrated Programme of Land Redistribution and Agricultural Development (IPLRAD) targets not only the number of households benefiting and the hectares of land transferred, but also sustainability of natural resources and wealth in agricultural production and commonage projects.
Marine fisheries: South Africa’s fishing industry experienced a turbulent history under the apartheid system. During this period, the state excluded coastal communities and black people from the fishing sector and favoured big companies. When apartheid came to end, an effort was made to include the previously excluded communities, largely through the distribution of transferable paper-quotas.
The 1998 Marine Living Resources Act sought to set out a policy framework that would reconcile the interest of all concerned parties. Amongst the principal aims set out in the Act were:
- to achieve optimum utilisation and ecologically sustainable development of marine living resources;
- to restructure the fishing industry to address historical imbalances and to achieve equity within all branches of the fishing industry.
The White Paper on Fisheries Policy outlines several ways the existing large players can meet the empowerment criteria needed to compete for access rights:
- expanding equity ownership in companies;
- restructuring of the industry in order to move in the direction of larger proportions of the quota being sold to small-scale fishing operators;
- encouraging contracts with fish-processing companies;
- helping small-scale operators improve efficiency;
- unbundling, mergers and the formation of co-operatives and other forms of formal commercial co-operation.
The South African fisheries industry has been fundamentally transformed with the implementation of a system for the equitable allocation of fishing rights to the commercial fishing industry and to historically disadvantaged communities and individuals. A high degree of black economic empowerment has been achieved in terms of the ownership of assets in the industry, as well as employment equity in the commercial fishing industry.
Minerals: The Minerals Act of 1991 regulated the prospecting for and optimal exploitation of minerals, and the rehabilitation of the surface of land during and after prospecting and mining operations. In 2002, the Ministry introduced the Minerals and Petroleum Development Act, which will vest all mineral rights in the state, giving private companies access only if they will use them productively.
In 1996, the government also introduced the Mine Health and Safety Act, which vastly improved systems for occupational health and safety around the mines.
Strategies to modernise and transform the mining industry include investment promotion, extending access to mineral rights, management of exploration information, human resources development, support for small-scale mining, beneficiation of minerals, and a social plan to address the negative consequences of restructuring in the sector. Programmes have been implemented to promote the beneficiation of minerals as well as to provide capital for small-scale mining ventures. Legislation currently in Parliament seeks to bring about a significant change in the ownership of the mining industry in South Africa. A new mine health and safety regime has brought about a reduction in fatalities and injuries in the mining industry.
Transport: Government policies on transport, as articulated in the White Paper as well as Moving South Africa, call for
- Strategies to meet the needs of different groups of users, especially rural users, urban commuters, business and the disabled. There will have to be some subsidisation of transport for remote rural users and urban commuters, who cannot afford to pay the full cost. This is necessary both for humane reasons and to maintain the economic viability of these regions.
- As far as possible, the institution of the policy of “user pays,” reducing cross subsidies from urban to rural and rich to poor communities.
- The development of corridors both at a national level and within urban areas. These corridors should overcome the high transport costs the resulted from the fragmented settlement patterns imposed under apartheid.
- A shift from road to rail on long-distance transport, and in general increased use of public transport instead of private cars.
Other policies, for instance around safety and standards, will be dealt with in the policy review for social development.
Tourism: Currently, South African tourism in urban areas is saturated, while little significant tourism investment has taken place in rural areas and peri-urban areas. So there is a strong argument to be made for targeted investment in these regions. Depressed rural and peri-urban areas often have great potential for nature and adventure tourism. Improving access to these regions could help turn around the fortunes of poor people in such an area.
- In this context, the Department of Environmental Affairs and Tourism (DEAT) has targeted:
- Spatial Development Initiatives such as the Lubombo SDI and the Wild Coast SDI.
- Priority Areas for Tourism Infrastructure Investment (PATIIs). These are areas of high potential.
- World Heritage Sites and Cultural Heritage Sites like Robben Island, St Lucia, Ukahlamba-Drakensberg and Sterkfontein Caves.
- National parks and reserves.
- Transfrontier conservation areas like Kgalagadi and Gaza-Kruger-Gonarezhou.
- Wetlands of international importance.
- Biosphere reserves.
To improve synergy between different spheres of government, DEAT has reached a range of agreements, for instance so that local government authorities will assist in cleaning up litter in tourist areas; the Department of Transport will improve road signage; and Government Communication and Information Services is developing and communicating the brand identity “South Africa Incorporated”.
The DEAT is looking at ways of allowing more previously disadvantaged people to benefit from local and foreign tourism. The Business Trust, through a programme called Tourism Enterprise Programme (TEP), has made R66 million over four years available for the development of small and medium-sized tourism businesses. This is expected to yield an eventual total transaction cost of R475 million.
Challenges and issues for discussions and resolutions
- The Mafikeng Resolution: Conference called on the Alliance to establish an employment strategy, which would include sectoral, spatial and labour-market measures to be cemented at a Presidential Jobs Summit with social partners. The strategy would include:
- Ending policies that favour capital-intensive forms of production, and possibly introducing policies to support activities that could create jobs. New measures should discourage employers from shedding labour.
- Measures to give previously marginalised groups greater access to productive assets, for instance through land reform and extension of credit. The poor should also have greater access to social capital, such as schools and clinics. These policies should stimulate both domestic demand and investment.
- Measures to reduce the cost of changing jobs, for instance by ensuring that workers could keep their pensions when they move between employers.
- Ending discrimination against black people and women in seeking employment and applying for promotions and training.
- Reducing the cost of wage goods – that is, basic necessities – that in turn would permit lower wage costs without reducing living standards for workers.
- Public works campaigns to create jobs on a large scale.
The Conference noted that this strategy would generally require more investment, both through the public sector and by encouraging higher private savings. Generally, the strategy called for higher productivity and greater international competitiveness as the source of resources for investment.
Progress: Although government has taken a wide range of steps to raise the levels of employment, it has only recently sought to take a more integrated approach to the unemployment problem. Existing policies include land reform and agricultural policies, small and micro-enterprise development, skills development, and industrial policy.
Government’s direct employment creation efforts have tended towards poverty relief programmes creating temporary employment through various forms of public works projects. Total employment creation reportedly came to roughly 150 000 mostly temporary jobs in 2000-’01.
The Presidential Jobs Summit was held in October 1998. However, many of the agreements were vague and lacked practical steps to be taken and were not aligned with government expenditure plans. Not all of the agreements were subsequently implemented. Some of the more successful agreements have been the Proudly South African campaign, the convening of a number of sector summits, and a framework agreement on a social plan to ameliorate some of the consequences of sector restructuring.
Labour law on retrenchments has been amended to make it more difficult for employers to retrench workers without fully considering other options. Wage incentive legislation is currently before Parliament to incentivise the employment of previously unemployed persons on learnership contracts. The Department of Labour is leading this process.
Government is looking at how to capture in a more coordinated manner the range of government instruments available to tackle the problem. The strategy also examined the nature and character of unemployment and the structural issues which result in unemployment.
Debates and Challenges: It is clear that the fight against unemployment is our central challenge. The need for sustainable jobs is glaring, but we should have no illusions. There are no magic solutions or quick fixes. Unemployment in South Africa is a deep, structural problem, reflecting the large inequalities we inherited in ownership and skills. New jobs will not be generated overnight, at least not in the numbers we need. Fighting unemployment will be a long haul.
We must be careful to separate out issues about poverty eradication and issues about the creation of sustainable jobs when considering the employment question. While these two objectives are linked they require different approaches. Comprehensive public works programmes as part of a community development programme are useful short-term strategies but are not a by themselves a long-term solution. Community development programmes will also create jobs through improved social services. The linkages with other strategies for small business development and black economic empowerment must be made explicit for these also need to be part of the total package of strategies to address unemployment.
There is a need to identify labour-intensive activities in our economy and find appropriate tools to promote and extend such activities on a sustainable basis. The integrated value matrix is a useful concept for identifying the labour-intensive activities within value chains and sectors. This is not as simple as designating certain industries that employ large numbers of workers as labour-intensive and promoting them. It is important to look at capital-labour ratios in sectors and, where appropriate, introduce incentives to change these ratios in favour of labour. Skills levels need to be taken into account too, many labour-intensive services are also skills-intensive. Thus targeted skills development is another crucial component of an employment strategy.
There is a clear skills dimension to the unemployment problem in South Africa. Unskilled and semi-skilled labour is more affected by unemployment, however, there is also an age dimension to unemployment that indicates that workers with some job experience are more likely to find new employment.
Many of the steps taken by government to tackle unemployment would have had a greater impact on the problem if they had been implemented in a more integrated manner. In addition, more work needs to be done to review the range of government incentives and support measures for their impact on the relative costs of labour and capital for enterprises.
- In charting a way forward, we need to take into account the following:
- The experience with the implementation of the Skills Development Strategy and the need for accelerated skills development programmes
- The agreement by government, capital and labour on a framework for a social plan
- The experience of sector summits in devising concrete strategies to lift employment levels in specific sectors
- The continued argument by capital that lower wages and less labour market regulation will lead to job creation
- The changing sectoral composition of the economy and the changing skills composition of production
- The massive need for community, social and personal services in our communities, including child-care, care for the elderly and the sick, as well as other community projects
- The high unemployment rate in South Africa must also be viewed in the context of a limited social safety net. If government does not strengthen welfare and involve the unemployed in community development projects we will continue to have unacceptable levels of poverty and social isolation.
Investment and Infrastructure
Mafikeng resolution: There was no clear resolution on investment and infrastructure taken at the Mafikeng Conference. It is important to recognise the important role of investment in infrastructure and raising growth levels in the economy. Well-targeted public infrastructure investment must complement industrial growth and investment.
- Infrastructure supports development because:
- It creates favourable conditions for production and consumption.
- It facilitates economic diversification.
- It provides access for people to services and opportunities.
The importance of infrastructure investment to economic growth is provided by studies that indicate that for every 10% increase in the stock of public infrastructure capital is associated with an increase in output of between 2 and 3 percent.
Investment in new infrastructure and the maintenance and rehabilitation of existing infrastructure needs to be a key priority for government expenditure. Infrastructure priorities include the provision of social infrastructure, including schools, community roads, health facilities, pension payout points, revitalising hospital infrastructure, improving courts and policing infrastructure, rail commuter infrastructure, and extending basic service infrastructure in poor communities.
A lot of has been to done to provide a conducive environment for investment in South Africa including a constitution that protects private property rights, national treatment for foreign investors, a large reduction in the level of government dissaving, a range of investment incentives, investment promotion and facilitation activities, as well as greater levels of policy certainty and stability.
Debates and Challenges: Changes in global capital markets have had implications for a national strategy to increase investment. Financial deregulation, real-time cross-border flows, new financial instruments and institutions have all influenced the nature of investment decisions. This significantly increased the opportunity cost of working capital tied up in production. The increased mobility of capital resulted in increased competition for investments, often based on the extent of integration into the global economy.
Savings and investment levels in the economy are still too low to generate the rates of economic growth needed to sustainably address poverty and inequality in our country. Thus there is a reliance on foreign investment into the country. South Africa has attracted foreign direct investment into the economy since 1994 despite a weak global environment for investment into emerging markets. Perceptions of policy inconsistency, a weak skills base, high cost structures and regional issues continue to be provided as domestic reasons for low direct investment by both foreign and domestic investors.
The Ekurhuleni Declaration adopted by the Alliance in April this year reflects a commitment to ensuring that the resources in the retirement industry, the life assurance industry, and other forms of savings, are more effectively mobilised for the provision of social and economic infrastructure, as well as investment in labour-absorbing activities. It was also agreed that the presence of labour representatives on the boards of many of the funds would be used to ensure more effective strategic use of worker funds.
Infrastructure investment, led by the state but with significant input from the private sector, has three broad objectives. The first objective is to improve the capacity of the state to expand the scope of the services it delivers; the second is to bring economic and entrepreneurial activities closer to the poor and historically disadvantaged and thirdly, to lower the costs of doing business in South Africa.
The delivery of social infrastructure (water, sanitation, housing, schools, clinics) is designed to improve the ability of the state to deliver services to people who, were for decades, provided with either little or no services. Without water schemes, clinics, rural roads and classrooms, the state is not able to improve the quality of the services it delivers. The delivery of useful social infrastructure is a key element of the implementation of the RDP. It is both a means to improving the quality of life and an end in terms of improving the quality and dignity of the lives of the poor.
The provision of social infrastructure is key in redistributing wealth to the poor. The delivery of social infrastructure must seek to break the spatial patterns that Apartheid entrenched. We have a settlement pattern in South Africa that was designed to exclude large sections of the population from the mainstream of the economy. Social infrastructure must be targeted at providing basic services to all South Africans and must endeavor to make South Africa’s cities more efficient.
Economic infrastructure on the other hand is aimed directly at lowering the costs of doing business in South Africa. Better rail, telecommunications, energy and transport infrastructure is able to make the South African economy more efficient, lowering the costs of production thereby improving the environment for investment and job creation.
South Africa, despite its relatively good infrastructure, has serious deficiencies that push up the costs of business. High telephone charges, wharfage costs, freight delays and an outdated rolling stock all push up the costs of business, directly reducing the profitability of companies and discouraging investment. Job creation will only be sustainable if levels of investment improve. Government-led investment in economic infrastructure is designed to crowd in private sector investment.
The combination of social and economic infrastructure allows for easier access to economic opportunities to the poor. Poor rural roads raise the costs of taking produce the market, they raise the cost of a person going to the city to look for a job and most importantly, they further distort the economy by keeping economic opportunities to groups of people that have benefited in the past.
- Government is piloting a new focus on critical infrastructure investment designed to improve the attractiveness of an area to investors. Through both direct infrastructure projects and tax incentives, government hopes to unlock the potential of key regions in the country. A change of strategy in government to respond to these challenges is evident. Higher levels of state investment in infrastructure and initiatives aimed at increasing exports are aimed at raising the level of investment in the South African economy.
Black Economic Empowerment
Mafikeng resolution: A the time of Mafikeng, the Black Economic Empowerment Commission had not yet reported, and the concept of BEE came under the National Empowerment Policy. The Mafikeng Conference resolved that:
The ANC should clearly articulate a National Empowerment Policy that will focus on those who have been historically disadvantaged and particularly black people, women, youth and the disabled and rural communities.
- The empowerment process must constitute part of a more radical and profound change in social relations. Changing ownership and workplace relations are part of this wider process.
- Within the National Empowerment Framework government should establish a National Empowerment Fund, which must stimulate savings, shift people from the informal to the formal sector, and guide SMMEs from the current predominance of retail to manufacturing.
- Government policy: Government does not yet have a comprehensive policy on BEE, although every department has programmes to achieve this aim. Generally, these policies also favour the empowerment of women. They include:
- The Employment Equity Act, which requires companies to develop plans to bring about representivity in terms of race and gender at all levels and bans discrimination in employment
- Procurement policies which favour companies owned by black people and women
- Proposals for restructuring state-owned enterprises which set aside shares for black investors
- The achievement of representivity amongst the most senior management in state-owned enterprises and government
- The Skills Development Act, which establishes structures to ensure that all workers have access to relevant and certified training
- The Minerals and Petroleum Development Act, which transfers mineral rights back to government
- Support for land reform and small and micro enterprise, which benefits black and women entrepreneurs.
- The elimination of formal segregation in the major social services, and moves to equalise spending between historically white suburbs and black communities.
- The establishment of the National Empowerment Fund.
- The establishment of Manufacturing Advice Centres around the country.
Most recently, government has developed a BEE strategy, in part, in response to the publication of the BEE Commission report. This strategy defines black economic empowerment objectives in terms of ownership and control of the economy, as well as improvement in the levels of household income. A draft BEE Bill to allow for the issuing of codes of practice and that sets out empowerment measurement indicators, definitions and guidelines will be promulgated. Government offerings to qualifying BEE enterprises include:
- Government procurement, including procurement by SoEs and government agencies.
- Opportunities arising from the restructuring of state-owned enterprises
- Opportunities arising from licensing and other regulatory instruments
Debates and Challenges: A clear national empowerment strategy has yet to be articulated. Such a strategy would contain specific instruments available to targeted groups to accelerate their economic and social integration. There is a clear overlap between the ANC’s general transformation and development objectives and a national empowerment strategy. The absence of a national empowerment strategy has given rise to ambiguity about the definition of BEE and the character of the empowerment process. The fundamental question is whether BEE aims to ensure blacks are fairly represented among the top owners and managers of companies, or whether BEE aims to improve the position of all black people, especially women, through measures that ensure a more equitable distribution of incomes and assets overall.
The ANC has adopted the second view, which means that a national empowerment strategy includes such broad-based redistributive strategies as land reform, reprioritisation of government services and job creation. A specific strategy to ensure that the levels of ownership and control of the commanding heights of the economy by the majority is equitable – black economic empowerment – should form a part of a comprehensive national empowerment strategy. However, a national empowerment strategy is not limited to only a BEE strategy. The failure to make this explicit has led to the view that empowerment is geared primarily to supporting black capital. There has been increasing focus on BEE but this focus has not been situated within a national empowerment strategy. Programmes such as set-aside programmes for black investors when selling state assets and a bias toward black-owned companies in procurement have reinforced this perception.
Further, such initiatives have had mixed success: n Special Purpose Vehicles have left many BEE initiatives heavily indebted n BEE initiatives in strategic sectors of the economy that are particularly averse to transformation still need to be developed n Front companies are formed to take advantage of the preferential procurement system n ‘Black-chip’ shares on the JSE have performed poorly.
Except for the sectors run by state-owned companies like Telkom, Eskom and Transnet, white-owned and -controlled companies and managers still dominate the economy. Blacks and women own only a tiny fraction of the private formal sector, and are heavily under-represented in management and technical positions. The high-level of concentration of ownership in the economy is a significant constraint to BEE. BEE strategies must be located in a context of lowering barriers to entry and growing the number of opportunities in the economy generally.
- Also, a major debate revolves around the usefulness of setting targets, and how targets should be understood. The ANC itself must do more to report and assess progress. On that basis, it may be possible to begin to develop clearer numerical objectives.
Financial sector restructuring
The financial sector includes all the institutions that deal with savings and loans, such as the regulators, the banks, community financial institutions, micro-lenders, government financial institutions like the Industrial Development Corporation (IDC), the Development Bank of South Africa (DBSA), Land Bank, Post Bank and Khula, and contractual savings funds – pension and provident funds, long-term life assurors and unit trusts. All of these institutions are important because: * The availability and cost of loans affects the level and nature of economic activity * The financial sector acts as an intermediary between savers and investors, and may therefore have an influence on the level and structure of investment.
The Mafikeng Conference did not adopt a resolution specifically on the financial sector. It did, however, repeatedly note the need to improve credit arrangements for small and micro enterprise, rural people and low-income housing.
The conference argued that government should continuously review its strategy with regard to the financial sector with the aim of enhancing its impact and involving more role players from all spheres of society.
The conference also called for engagement with the banking sector in order to influence its lending patterns and services in support of the historically disadvantaged communities. Public sector financial institutions were told to focus their support on these communities and to enhance their targeting to ensure maximum impact.
The National General Council in July 2000 committed the ANC to promoting the development of socially accountable capital, the allocation of capital to the benefit of disadvantaged people and communities, and equality in wealth by supporting increased ownership of assets by workers and communities.
The ANC’s programme for economic transformation includes effective and realistic measures to reduce real interest rates and the cost of capital, especially for job-creating projects, small businesses and infrastructure development, and to direct the investible surpluses already accumulated in financial institutions and pensions to support economic transformation.
Since the Mafikeng conference issues around the financial services sector have become more prominent. It was raised at the NGC in 2000 and some of the debates on the sector have become institutionalised through a process in Nedlac to prepare a financial services sector summit.
In government, responsibility for the financial sector is split between the Reserve Bank, for commercial banks, and the Financial Services Board (FSB), for investment funds. The FSB is a joint venture between the Bank and major private financial companies.
Government does not have a White Paper on the financial sector. Its major concern has been balancing the need to protect savings and maintain South Africa’s sophisticated financial networks while pushing for more innovative lending and investments. The inherited Banking Act and the FSB’s regulations generally aim to reduce the risk to investors and to let the companies maximise returns, including by limited investments abroad.
Government has set up or redirected a range of specialised state-owned financial institutions: the LandBank for farmers, PostBank for rural savers, Khula for medium and small enterprise, the National Housing Finance Corporation for housing bonds, the DBSA for rural infrastructure and the IDC to package industrial finance. Actions have also been taken to improve consumer protection in the financial services sector including regulation of microlenders. Government is also working on improving regulations in the area of credit bureaus as well as community reinvestment legislation. Government has generally avoided strong regulations or direction for the established private companies. An exception is housing finance. Faced with the reluctance of the commercial banks and other financial institutions to lend to low-income home buyers, the Department of Housing has introduced a legislative package that, when finalised, will end redlining and other forms of discrimination, establish an ombuds system, and require banks to report on their home loans by size, race and gender. These laws only apply to home loans, however.
Debates and Challenges: The current Banking Act sets very high capital requirements for registered banks, making it difficult for smaller, community banks to function. The Reserve Bank has given village banks and co-operative banks an exemption from the Act so that they can operate.
Engagement at Nedlac in the run up to the Financial Sector Summit, now planned for mid-August, seems likely to lead to more explicit and vigorous measures to restructure the financial sector. In particular, some agreement seems likely on regulation of credit bureaus, development of more appropriate legislation for co-operative banks, anti-discrimination measures, and the direction of contractual savings toward more productive investments.
- Restructuring of the financial system should be aimed at achieving the following three goals:
- To provide adequate investment for growth, development and job creation, not only in the larger formal sector, but also for small and micro enterprise and low-income home buyers;
- To help finance expanded government expenditure on social and economic infrastructure at the lowest cost possible; and
- To extend the provision of financial services in poor communities.
A critical question is whether the problems with the financial sector reflect inescapable economic imperatives, or the nature of the sector and its management. In the event, the sector is highly concentrated and conservative, which contributes to the failure to find more constructive and creative responses to South Africa’s developmental challenges. But the financial sector alone cannot overcome the obstacles to development. By extension, measures to transform the financial system must be embedded in a coherent and comprehensive development strategy.
- A variety of possible instruments exist for influencing decisions by financial institutions. They include the location of government accounts; requirements around the direction of credit and establishment of outlets; support to new kinds of borrowers; deposit guarantees to protect lower-income depositors; tax incentives or sanctions; anti-discrimination requirements and procedures; and direct support for innovative forms of financial ownership, such as co-operative banks and stokvels. In the absence of a coherent policy, however, these instruments have not been used to transform the financial sector.
The next five years
In the next five years, the objectives of the transformation programme should not change as there is still more to be done to fully attain these objectives.
However, there needs to be a redefinition of the agenda of the economic transformation programme. This redefinition needs to build upon the platform that was established in Mafikeng in 1997 and the subsequent implementation of strategies and programmes by the state.
Many of the broad strategies of the ANC’s economic transformation programme are in place. These strategies need to be sharpened through the quantification of objectives and clearer programmes of action. A greater degree of consensus needs to be built around these strategies and the tools for implementation.
- More attention must be paid to the political and technical management of the economic transformation programme. In particular, we need to focus on the sequencing of reforms, their overall coherence, partnerships for collective action, the ongoing transformation of the state into an effective agent for economic reform.