We have been very shy to speak boldly about structural economic reforms to address a system still bearing an apartheid architecture… The cost of living has also been increasing with prices of food, fuel and education all going up by huge margins…Covid-19 presents a plethora of challenges, chief amongst them is the looming unavoidable job losses, contraction of the economy, ever-increasing budget deficit and shrinking SARS revenue.
By Sigqibo Biggz Mfuywa (PhD candidate at University of South Africa)
Over the past 26 years the post-apartheid (or democratic) government has adopted numerous economic plans, all anchored on a robust economic growth of not less than 6%. That target is yet to be achieved sustainably over at least a decade and many blame this on poor execution. But is that the only problem?
We have been very shy to speak boldly about structural economic reforms to address a system still bearing an apartheid architecture. The ANC government has made strides to transform the economy but little has been achieved, and many factors contribute to that. As a result, the economic transformation debate has become a dominant discourse. People of South Africa are tired of being unable to play a meaningful role in the mainstream economy. Another cohort is tiredness with jobless and inability to put food on the table.
The cost of living has also been increasing with prices of food, fuel and education all going up by huge margins. Corruption, racism and incompetency have played a huge role in our economic woes. We are now talking about a new economy post Covid-19 and this presents vast economic opportunities.
However, Covid-19 presents a plethora of challenges, chief amongst them is the looming unavoidable job losses, contraction of the economy, ever-increasing budget deficit and shrinking SARS revenue. The United States is already reporting 20 million job losses between February and April 2020, which has pushed unemployment to almost 15% in 3 months. The South African Revenue Services Commissioner Edward Kieswetter predicted 15 to 20% revenue losses which translates to R285 Billion. And this is due to a sluggish economy and effects of the corona virus. The agency also predicts that some businesses will not survive post Covid-19. The effects have been severe and survival is doubtful.
The junk status is also adding salt to the wound, and we need to dig deep and find solutions post-Covid. Credit rating agencies have not been kind to South Africa and Moody’s in particular has warned that an increased likelihood of “the debt burden….ris(ing) to even higher levels than currently projected, with even greater uncertainty regarding its eventual stabilisation, would exert downward pressure on the rating”.
Some pundits are predicting that South Africa will hit 40% unemployment rate post-Corona and this will be a major blow for our ailing economy. Currently our economic growth outlook has been revised downwards to below 1%. Other pundits are predicting a negative outlook. Our budget deficit has been on an upward spiral and debt-servicing costs have not been kind.
Our key economic drivers i.e. mining, manufacturing and agriculture have not been doing well in the recent past. We have witnessed consistent contraction hence we now in recession. We have now witnessed a big debate gravitating towards Quantitative Easing, and this cannot be ignored as it is exerting a lot of pressure on the South African Reserve Bank (SARB). Some argue that this unconventional way of doing things is long overdue, cutting only interests will not be sufficient, and we need to go beyond that.
Investopedia website defines Quantitative Easing as an unconventional monetary policy in which central bank purchases long-term securities from the open market in order to increase money supply. In the recent past SARB has spoken about injecting liquidity into the economy and buying some government bonds. The current period requires unpopular decisive decisions. We must not be haste or casual. The long term effects will be severe.
The following should happen:
Import substitutes: this is defined as a replacement of imports with domestically produced goods, rather than the production of goods for export, to encourage the development of a domestic industry. South Africa is the 34th largest export economy in the world and the 47th most complex economy according to the Economic Complexity Index (ECI). In 2017, South Africa exported $108 billion and imported $81.9 billion, resulting in a positive trade balance of $26.4 billion. In 2017 the GDP of South Africa was $348 billion and its GDP per capita was $13,5. At all times our exports must exceed imports, but we must import what we are not capable to produce locally. This picture illustrates that we are big on imports and it must change if we are to grow South African economy.
The Covid-19 is exposing South Africa in many fronts. We are even importing goods like masks, something our textile industry should be producing. We should reach a stage wherein we reduce our imports considerably and increase our exports. This is only possible through industrialization and increasing our value adding, manufacturing and agro-processing capabilities.
This requires a protectionist approach, which is backed by legislation and thorough analysis of trade agreements. It is time to close ranks and protect our industries especially those in agriculture, manufacturing, textile etc. It should be coupled with stimulating domestic demand. Many of these industries have complained about how imports have killed them over the years. We must only import what we cannot produce locally. For example, do we really need to import poultry from US or Brazil?
Value Chain Analysis and Integration: The value chain approach seeks to understand the firms that operate within an industry from input suppliers to end market buyers. Meaning the support markets that provide technical, business and financial services to an industry. And the business environment in which such an industry operates.
The value chain analysis is very important in making sure that we take advantage of what we produce by adding value instead of us being exporters of raw material. Throughout the chain a lot of jobs can be created and these would in turn stimulate local economy. Whatever we produce we should add value to up until the consumption stage. For example, we have an abundance of mineral resources and it is unclear why we are we not processing these. We should look at our production potential and make an assessment in order to exploit our competitive advantage.
Localization: For a very long time we have consumed goods from outside our borders. Locally produced items battle to command space within the local market. These are low hanging fruits.
In agriculture, by way of example, all schools, hospitals, correctional services centers and others should be supplied by their local farmers. There should be deliberate aggressive marketing strategies targeted at promoting local goods, and legislation should be enacted to advance this agenda. The automotive sector should also be sourcing some components locally. Mercedes Benz South Africa (MBSA) in East London or VWSA in the Nelson Mandela Bay should be buying leather from local tanneries. These car manufacturers must intensify efforts into localizing production, service and repair parts.
Industrialization: “One district one factory” should be our slogan and this can go a long way. A socio-economic assessment should be done per district in an attempt to establish potential industries which can strive in that locality. These should be labor-intensive industries, which will create millions of jobs and in turn alleviate poverty and stimulate growth. This is the only way to create jobs, increase tax base and develop local economies.
Government should set aside funding dedicated for establishing these factories jointly with private partners. There are many industrial hubs which were used by erstwhile governments before 1994. Those should be brought back to life. Fort Jackson, Dimbaza, Butterworth etc. come into mind.
Resuscitation of Vocational Institutions: Post-1994 we have witnessed the consistent decline in the supply of artisans in the country. This can be attributed to challenges faced by vocational institutions. For most of the above to be a success there needs to be strong vocational institutions which will focus mainly on producing artisans. In terms of today’s experiences, it is not clear why a vocational college offers office management or accounting instead of focusing more on artisanal skills.
Vocational institutions should strategically partner with government and business to produce the required skilled force. For an example the maintenance of roads, buildings and government fleet should be carried out by artisans from these vocational institutions. Mini factories should be built for some of the artisans, i.e. mini industry hubs for welders, spray-painters, etc.
Access to Finance by SMEs: According to the World Bank, Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development.
They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. According to estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs. However, access to finance is a key constraint to SME growth. It is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.
Small business enterprises are a backbone of any economy. No economy can grow if this sector is neglected. The SME sector in South Africa makes a significant contribution to job creation. Thus entrepreneurial activities must become a cornerstone of our economic growth and this can be an important source of net job creation, which the country sorely needs.
One of the notable predicaments that this sector face which the World Bank also speaks about is financial exclusion i.e. access to finance. Improving access to finance or funding for SMMEs is an important step towards improving the country’s economic growth. It is not a doubt that funding for small businesses has increased exponentially over the years but the major problem is access. For an SMME to be financed for both Capex and Opex, a plethora of requirements must be met which is often difficult for a small black business.
Some of the requirements to access finance must be relaxed, for example 50% own contribution. We have some Development Finance Institutions (DFIs) who operate like commercial banks. They want surety, audited financial statements, proven track record, healthy credit history. Though an affected black entrepreneur has an idea that is viable but because he doesn’t meet the DFIs requirements, is denied access to finance. This disconnect between small black business and government funding institutions need serious attention and it must be fixed now. To address the cancerous problem of unemployment, it is important to deal with access to funding.
Gideon Nieman in his book titled Small Business Management: A South African Approach (2006), wrote extensively about SMMEs in South Africa. There is no way that a developmental state like ours can ignore this sector because:
- Its labour-absorptive capacity
- Allows for more competitive markets
- Can adapt more rapidly than larger organisations into changing consumption patens
- Often utilize local resources
- Provides opportunities for aspiring entrepreneurs, especially those who are unemployed, under-employed or retrenched
- Workers at the smaller end of the scale often require limited or no skills or training; they learn on the job
- Plays a vital role in technical and other innovations
This could be the catalysts we need for a new compact on rebalancing the structural defects in our economy. As stated by President Cyril Ramaphosa, “with the local and global economy under pressure, it is small enterprises that present the greatest potential. I have long said that entrepreneurial skills should be included in the basic education curriculum”.