Economic Tips for the New 6th Parliament

Economic Tips for the New 6th Parliament

#SADecided

"More than half of the population withdrew their consent in this last election, holding little hope for this system to respond to their crisis in any coherent or meaningful way. Despite the many possible actions that could be taken, the new parliament and the new administration will almost certainly vindicate their choice."

South Africa’s economy remains, by any sensible measure, deep in recession. Companies involved in the grain trade report that consumers are cutting back on bread purchases. Headline gross domestic product (GDP) is supposedly growing again, but this is largely due to quirks in measurement that turn rising costs in healthcare and finance into “growth”. Even with those quirks, GDP must always be related to population growth. GDP per capita has been in recession since 2015 and remains in recession. Unsurprisingly, unemployment is now near 28 percent.

What can the new parliament and the new administration do? A great deal, if they are willing to be pragmatic and creative, to act based on the economy’s real weaknesses rather than the president’s sense of what the business media will praise as “reforms”.

The economy has three core weaknesses: first, that households save too little, companies save too much, and both invest too little; second, that skilled labour is too protected and unskilled labour is too exploited; third, that extreme inequality means large parts of the country have no capital or other resources from which to develop new productive activities. Those combine to create a chronic shortfall of demand for everything except low-income services jobs (at present, not even those) and imported luxuries, as well as chronically high costs that keep exports uncompetitive and prices high.

The Quick Fixes

Some steps to address those weaknesses would be simple. The most obvious would be to immediately allocate 4G and 5G spectrum to the mobile networks, without an auction, but at the same time to amend the legislation that governs the sector and give the Independent Communications Authority of South Africa (ICASA) the power, like its counterparts in other sectors, to set price caps. In other words, give the networks spectrum while forcing them to lower data prices. That would reduce one of the most important input prices in the economy, while also unlocking investment in network rollout.

Another regulatory change would allow households and cooperatives to more easily produce their own renewable energy and to sell excess back to the public power grid. At the moment, anyone who generates more than one megawatt (a cap easily breached on, say, a large office building or a medium-sized farm) must obtain a license from the National Energy Regulator of South Africa. It is a cumbersome process that delays investment. Lifting the cap to 5MW would immediately lead to a surge of investment in distributed renewable energy.

A third would end the department of home affairs’ continued attempts to restrict skilled immigration by expanding the critical-skills list instead of cutting it. One of the actions promised in the “mini-stimulus” of September last year was an easing of the bureaucracy on immigration.1

While the contentious rules regarding birth certificates for travelling minors have been rolled back, easing constraints on tourism slightly, there has been little progress in facilitating skilled immigration – in fact, the critical-skills list has been cut significantly. Our immigration regime is upside down. Obstructing skilled migration gives unwarranted protection to South Africans with skills while unskilled migrants are exposed both to unscrupulous employers, who take advantage of a lax regime that fails to protect poor foreign workers, and to xenophobic violence.

A whole series of long-overdue regulatory reforms should be introduced to throttle consumer lending and encourage people to save. Unsecured and predatory consumer-lending needs to be made less profitable by introducing levies on such loans, along with interest-rate caps and a ban on debit orders that allow the poor to sign away authority on their bank accounts like a barbaric relic of apartheid. Those actions could be taken today and could already have been done; indeed, some were announced long ago and simply not carried through.

Short-term Steps

Other steps for the new administration are more ambitious. The two with the greatest potential in the short run explicitly target savings and investment, for households and companies respectively.

The first would remove the failed housing subsidy for first-time buyers and replace it with a mortgage guarantee available to the working poor. The current programme gives first-time homebuyers a cash amount to help with a deposit. Homebuilders simply add the amount of the subsidy to the asking price, and the programme reaches a few thousand people at most because it does not leverage the ability of banks to lend. But we desperately need much more housing construction: we build several hundred thousand houses a year less than we should and public housing will not fill the gap. A better programme, akin to those across much of the developed and developing world, would instead focus on pooling the risks of low- and middle-income mortgages. A programme that, for example, absorbed the first 20 percent of losses on mortgages to people earning R5 000 to R15 000 a month, paid for by a levy on all mortgages, would unlock hundreds of billions in lending for household investment.

The second step, targeting companies, would be a change to the tax code. Introduce a second VAT rate on luxury goods, at 30 percent, and raise dividend taxes from their current 20 percent to 50 percent, with an exemption for pension or provident funds. The proceeds could be used to introduce an immediate tax write-off for any fixed investment undertaken in the following three years. In other words, tax the absence of household and company savings – as revealed in consumption and dividend payouts – and use it to heavily incentivise immediate investment.

Along with that broad change could come a more focused “good jobs mandate” to replace the youth-employment tax incentive, the Jobs Fund, the Youth Employment Service and the like. It would have a simple mechanism. For example, any company that grows the number of above-average-wage jobs by more than 10 percent a year receives all the pay-as-you-earn (PAYE) taxes back on those additional jobs, plus an easier labour-law regime for employees earning over R30 000 a month. This would give companies a large and simple financial incentive to create jobs plus the ability to more easily remove underperforming high-cost personnel, while not giving up any protection for lower-income workers or the working poor.

This step should, however, contain one crucial provision for the singular case of the multinational media-and-internet giant Naspers. Naspers has been responsible for a huge amount of the growth in the Johannesburg Stock Exchange (JSE) in the last decade, due in large part to its 30 percent ownership of Tencent, a Hong Kong-listed Chinese internet company that is worth as much as Facebook. Although Naspers itself is valued at R1.5 trillion, its stake in Tencent is worth roughly R2 trillion. Closing that gap would bring an enormous R500 billion inflow to South Africa – almost ten times the capital flows at stake with the feared “junk status” credit rating.

Naspers would not need to sell its stake to close that gap. It could announce that, until the gap is closed, it will sell shares in Hong Kong and buy back in South Africa. Any holder of Tencent shares would rationally sell in Hong Kong and buy Naspers shares. Most of the inflow would accrue to workers’ pension funds and ordinary investors in the JSE. To make that happen, the government would have to craft an explicit incentive for Naspers. For example, it could allow that, where there is a clear, unequivocal and persistent gap between the value of a company’s shares and its assets (and, to make it even more specific, it is involved in a foreign-listed security), the buyback of such shares would be fully exempt from the increase in the dividends tax. The only case that would plausibly qualify would be when one company owned shares in another and those shares were worth much more than the company itself.

Entrepreneurs and Education

Immediate policy changes, unlocking housing credit, and unlocking corporate savings would deliver a jump-start to the economy. But one further pool of capital needs to be tapped: the money that is tied up in underperforming small-business and industrial-development programmes, all of which are encumbered by layers of bureaucracy. They all should be shut down and their resources concentrated into two programmes.

One would provide a R200 000 grant to thousands of township entrepreneurs each year. All they would have to do is submit a business plan – which would be ranked, not evaluated – and the top 1 000 would enter the programme. They would receive cash, with no requirement to spend the money on nonsense consultants or accelerator programmes. They would receive the same grant again for the next ten years, provided that each year they stayed in the programme and grew their payroll. When the World Bank set up a similar programme in Nigeria, far from everyone running off with the cash, the results were hailed as possibly “the most effective development programme in history”.2

The policy measures described above would combine quick policy wins, large but straightforward tax and credit changes, and the reorientation of failed programmes away from bureaucrats and consultants and towards a direct injection of resources into townships and growing companies that create good jobs. Behind that would have to come true land redistribution to black commercial farmers, but not through the state. A progressive land-value tax on all farms above, for example, 100 hectares, would be made steep enough that it was effectively confiscatory over 15 years (for example, 5–10% of the value of the land per year), and channelled into another credit underwriting programme that allowed tenants and small commercial farmers to acquire up to the same amount (100 hectares) along with inputs, extension services and the like. Alongside that – in the medium term, once the economy was growing rapidly again – would come the heavy promotion of employee share-ownership and worker representation on company boards.

But the single most important task is fixing education, without which all the rest is a Band-Aid. The task is huge and complex and cannot be covered here, but clearly entails a massive improvement in the quality of teachers. One simple and immediate step would be to require the department of higher education and the South African Revenue Service to cooperate in building a simple, easily accessible database of every qualified vocational school and technical college in the country, public and private, and to calculate what proportion of their students are in jobs a few years later, and how much they are earning in those jobs. This would be a somewhat simple task of merging two databases, but it will not happen if parliament does not force it.

All those technical schools falling below the average in employed graduates and earnings should have their licenses revoked. This should be repeated every five years. Prospective students and their parents should have access to the statistics on any given school. The publicly funded vocational schools are broken beyond repair – I work in the IT industry and few people will even interview graduates of them – but many, if not most, of the private colleges are just as bad. True reform will require deep intervention, but greater transparency that empowers parents and students and keeps them from wasting precious resources on colleges that provide no route to employment would be a good start.

Unfortunately, almost none of the above steps will be taken. The new parliament and the new administration will have the same concerns about protecting their jobs as before, in fact even more. A year ago, they at least had to worry a little. Now they can relax for a full five years. Those in the administration peddling the same old dead ideas will be buoyed along by the approval of the business press and their middle-class friends, and by the various narratives excusing their lethargy as the result of “factions”. There will be some small-bore “reforms”, likely targeting the working class, and the economy will pick up a little – at least until the long global expansion ends, as it is threatening to do, and we slip back again. More than half of the population withdrew their consent in this last election, holding little hope for this system to respond to their crisis in any coherent or meaningful way. Despite the many possible actions that could be taken, the new parliament and the new administration will almost certainly vindicate their choice.

Notes

1 President Cyril Ramaphosa: Economic Stimulus and Recovery Plan, 12 September 2018. www.gov.za/speeches/president-cyril-ramaphosa-economic-stimulus-and-recovery-plan-21-sep-2018-0000

2 Blattman, Chris. Is this the most effective development program in history? Chris Blattman: International Development, Economics, Politics and Policy Blog. 24 September 2015. https://chrisblattman.com/2015/09/24/is-this-the-most-effective-development-program-in-history/

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