Are we treating the symptoms rather than the cause of economic malaise?

First Published in Business Day on   November 25th, 2019   |   by   Gracelin Baskaran

Are we treating the symptoms rather than the cause of economic malaise?

Institutional reforms should supersede focus on investments because restoring legitimacy of public institutions is critical

SA has spent enormous time and resources on an infrastructure fund and investment conferences in an effort to boost economic growth. Despite these efforts there is limited evidence that markets have bought into these approaches, apart from the pledges made at the conference. SA’s fixed investment fell 1.4% year on year in 2018, according to data from Stats SA.

Regarding total investment as a percentage of GDP, SA is at about 17.9% — lower than the Sub-Saharan Africa average of 20.6% and well below the global average of 26.3%. A decade ago SA sat at 23.3%. Are we treating symptoms rather than the root cause of limited economic progress and sluggish investments? To revive the economy, restoring legitimacy in public institutions is critical.

Legitimacy — the perception that the actions of institutions are in the interest of the people, the political and social principles of the country and in the long-term interest of equitable economic growth — is not a commodity that can be possessed or traded. As American sociologist William Richard Scott put it, the critical nature of legitimacy is much like oxygen: you need it to survive, or it is death. For an economy, that means a downhill spiral to the bottom.

Strengthening legitimacy is no small task, which means we must prioritise institutions that are the most critical for maintaining the stability of the SA economy and society. Institutions can be split into three categories: economic, social and legal. Each category has institutions that require a high degree of legitimacy to bolster investor confidence, and thereafter growth and stability.

The economic institution category broadly includes the Treasury, SA Revenue Service (Sars), the Reserve Bank, the Competition Commission, the International Trade Administration Commission (Itac), the Industrial Development Corporation (IDC), the department of mineral resources & energy and the department of trade & industry (DTI).

Not all of these institutions have been adversely affected by the past decade of economic and political mismanagement. For example, the Bank has managed to withstand the headwinds, anchored by strong leadership and sound policies, while Sars and the two government departments have had a series of shortcomings. Therefore, when we think about institutional reforms within this category we need to prioritise carefully.

For example, while there are positive signs at Sars after the appointment of Edward Kieswetter as commissioner, a new boss cannot instantly solve years of systematic institutional shortcomings, including corrupt former management, weak revenue collection practices and unsatisfactory supervisory and enforcement capacity. Given that Sars is central to the operation of every other government entity, the professionalisation of its officials and reform of internal processes to ensure competence and consistency is a priority.

In addition, economic institutions should be capacitating and co-ordinating the above-mentioned industrial institutions to create an institutional environment that favours investment by providing appropriate support, ensuring policy stability, coherence and implementation of adequate enforcement. For example, boosting the manufacturing sector has been a DTI priority for many years.

Severe deterrent

But to actualise growth of the sector, the DTI’s industrial priorities should be complemented by Itac, which can implement reasonable import tariffs on international competition to increase the competitiveness of domestic firms. The IDC can provide liquidity to domestic firms that are being prioritised by the DTI. And the Competition Commission can ensure these policies are equitably beneficial, rather than favouring a few big businesses.

As a country we have been too focused on feel-good moments, rather than targeted systematic adjustments to ensure greater co-ordination. For example, while SA’s recent investment conference was viewed as an achievement, it was really a basic vehicle for testing the investment appetite. Though people have pledged billions of rand, it remains a sentiment rather than a contract. Before companies deploy capital they carry out due diligence in their sectors of interest, a process that will likely bring them back to weak institutions as a heavy deterrent.

The second group is legal institutions, which includes the Constitutional Court, department of justice & correctional services, the police, the National Prosecuting Authority and the Hawks. Like the Bank in the economic institutions group, the Constitutional Court has remained steadfast, even amid the dark clouds of state capture.

However, other entities have weakened under poor management, which has adversely affected safety. According to Stats SA’s annual Victims of Crime survey, there has been an increase in crime since 2016 and citizens are becoming increasingly frustrated with the police. Turning the policing service around is a key priority, because the consequences of not doing so are social and economic.

In the letter he penned to the nation on November 18, President Cyril Ramaphosa referred to an emergency action plan intended to tackle high levels of gender-based violence, including special training for the police. But will training turn things around? In the recent past we’ve seen a continued unwillingness by the police to be present at crime hotspots or to respond to crises with urgency, which has translated to growing boldness by criminals who know they won’t be held accountable for their actions. The shortcomings of the police have substantial economic ramifications — tourists are less likely to visit, small businesses are heavily affected by break-ins, and foreign investors are afraid of crime rates.

The third grouping — social institutions — includes entities such as the departments of basic education, higher education & training, health, social development, co-operative governance & traditional affairs, and public enterprises. Though the sixth administration has brought in a new group of ministers to oversee some of these entities, this has not yet translated to an improvement in social outcomes and a reduction in inequality.

Short-sighted approach

SA remains one of the world’s most unequal countries, and social institutions that can help mitigate this gap should be prioritised. The delivery of education and public health have largely fallen along lines of wealth. The rich use private schools and health care, while the poor rely on underfunded schools and shoddy public hospitals. Ensuring that the poor have access to high-quality education — including textbooks, capacitated teachers and sufficient school infrastructure — is critical to breaking the poverty cycle, while high-quality health care is vital to ensuring we have a healthy and able workforce.

While investment has dwindled in the recent past and policy efforts are focused on turning this around, the short-sighted approach of focusing on attracting investments, rather than driving institutional reform, will lead to a celebration of commitments without a clear path of action.

Citizens and investors alike want to believe that our institutions are working in the interest of the people, in line with the political and social principles of transformation that SA holds dear, and in the interest of long-term equitable economic growth.

We’re running out of chances and time to get this right. We must focus on executing institutional reforms before we lose legitimacy with the markets. Like Scott’s parallel to oxygen, once it’s lost, it’s going to hurt.

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