South Africa shooting itself in the foot

The burden of government institutions on the private sector and citizens has become excessive, with even public administration being impacted. 

This is feedback from the World Bank in its latest report on South Africa, Driving Inclusive Growth in South Africa, released in mid-February. 

“The burden of institutions has become excessive – not only for businesses and citizens but also for public administration,” the World Bank said. 

“South African policymakers have attempted, often with good intentions, to correct market or historical failures by intervening through hard regulations.”

Examples of this include Black Economic Empowerment policies, local content regulations, and collective labour bargaining schemes. 

The World Bank also singled out direct support programmes for specific groups, such as social grants, tax rebates, and labour training programmes, as excessive government intervention. 

“Today, these interventions have become so cumbersome that they smother the implementation capacity of the public administration, particularly local officials, and open spaces for corruption.” 

This, combined with the effects of state capture, significantly hinders the ability of public institutions to perform their roles in society.

State capture effectively dismantled accountability mechanisms within the state and resulted in the government losing skilled personnel in key positions. 

As an example of what can happen if the government gets out of the way, the World Bank pointed to South Africa’s telecommunications sector. 

The government introduced competition to the telecommunication market in the early 2000s, making South Africa one of the middle-income countries with the highest rates of digital penetration and exports. 

In parallel, the private sector also benefited. MTN, a South African multinational mobile telecommunications provider, is now doing business in 22 countries around the world. 

The same approach has been used in aviation transport, with the emergence of several regional private companies and, more recently, in power generation, where competition has led to an unprecedented increase in renewable energy. 

The World Bank said there are no obvious reasons why such an approach, coupled with smart regulations, cannot be applied to other sectors.

As an example of what could be done with more efficient public institutions, the World Bank pointed to the impact of social spending on poor South Africans. 

It said the outcomes of such spending could be improved dramatically, not by spending more but by upgrading the quality of institutions. 

For example, to help young workers enter the labour market, the government could coordinate the 100 active labour programmes it currently has dispersed across 20 institutions. 

Instead of helping young workers enter the labour market, the World Bank said these labour programmes lack any coordination, are unaffordable, and weaken capacity – producing poor results. 

On a broader scale, the government could erase extreme poverty if all the financial resources allocated to social grants, around 4% of GDP, were just equally given to the 10 million South Africans living on less than $2.90 a day. 

“So, the challenge is not necessarily the lack of financial resources – it is how to use them efficiently using the most appropriate institutional framework,” it said. 

Making South Africa’s public institutions more effective and efficient could go a long way in boost economic growth in the country. 

The World Bank said there are numerous examples of countries that have opened up markets to private competition and reduced the size of the state to make it more efficient in developing extremely quickly. 

“Several East Asian countries, such as Indonesia, Malaysia, and South Korea, transformed their economies by relying more on market forces, opening selected markets to competition, and adjusting their economic institutions.”

It also pointed to Sweden in the 1990s as an example. 

“Sweden in the 1990s was exhibiting similar signs of paralysis as South Africa today: slow growth (around 1.6%), high public debt (80% of GDP), and fairly high unemployment,” it said. 

“So, it switched to a new economic model. In less than five years, it reinvigorated its economy, doubling GDP growth to 3.1%, reducing unemployment to 6%, and cutting public debt to 40% of GDP.”

Sweden did this by opening domestic markets to competition and refocusing the public footprint to areas where the state is the ideal actor to provide essential goods and services.

It also streamlined regulations to maximise market efficiency and affordability.