South Africa: Restoring Confidence to Oil the Wheels for Growth

It’s been almost 25 years since the end of apartheid, the system of institutionalized racial segregation that left most South Africans with limited access to basic services. The post-apartheid years saw remarkable progress in terms of poverty reduction, access to education, and reducing unemployment. But some of those early achievements have unwound recently amid slow growth and political uncertainty.

The IMF’s latest assessment of South Africa’s economy projects real GDP growth will stay slightly below 2 percent in the medium term, not enough to increase living standards or make a dent in unemployment.

Ana Lucía Coronel, who heads the IMF team for South Africa, sat down with IMF Country Focus to talk about some of the issues the economy is facing.

The word “confidence” is found throughout this report. Why is there such a lack of confidence in so many sectors, and what has been the impact on the economy?

The word confidence is very important for economic analysis because it refers to the variety of beliefs that economic agents have about the environment that surrounds them. Consumer confidence refers to households’ expectations of how likely it is they’ll find a job and what their income might be. Investors’ confidence is related to their prospects of whether their profits are going to be higher or their assets are going to gain value. And building or not building confidence depends to a considerable extent on the policies the government conducts. That’s why confidence is important, and that’s why we focus on confidence in the report.

In the case of South Africa, confidence among stakeholders has been weak during the last several years, leading to low rates of economic growth. And that has been in part related to the fact that governance is not at its best. Corruption in South Africa has had an impact on the trust of the population in their leaders and their institutions. For confidence to improve permanently and contribute to higher investment and employment, economic agents need to see tangible progress in the economic environment.

Do you see signs now that there is the political will to address some of these underlying issues like corruption and transparency? 

Yes, I think the new government is aware that corruption is a big obstacle to growth. Investors and consumers have delayed their decisions to invest and spend, and that has had an impact on job creation. We believe that the political change has marked an important turnaround. President Ramaphosa has publicly stated that he wants to combat corruption and increase transparency, and he has made this objective part of his economic strategy.

So, the political will is there. We have seen that some bold steps have already been taken. In particular, the boards and the management of some key state-owned enterprises have been changed with the objective of replacing questionable officials with credible officials. Also in the tax revenue service, there has been a major revamping that will allow collecting taxes that were in the past lost to corruption. And we understand that some public officials who have been involved in illegal practices are being prosecuted.

Given that South Africa has good laws and good institutions, the objective is just that transactions and contracts adhere to these good laws and institutions, So, combating the problem of weak governance in South Africa should not be as hard as in other places.

The strong political commitment to deepen governance reforms will also allow the government to go ahead with other reforms that the country urgently needs, particularly those related to the products and labor markets, to fight unemployment and inequality.

Inequality in South Africa remains a huge problem despite its relatively good institutions and infrastructure. Why this increasing disparity between the rich and the poor, and where do they need to invest to change that trend?

Yes.  In fact, South Africa is one of the most unequal societies in the world, and to some extent this reflects the legacies of apartheid which still weigh on the economy. Black South Africans are still by far poorer than white South Africans, and there are disparities within races as well. Also, there is a pay gap between women and men of about 30 percent, which is quite high, and where people live still determines how much access they might have to an education and to a job.

Inequality is a complex issue that is very related to the lack of jobs. So, there is a need for reforms in the economy to be able to create jobs. Reforms should focus on facilitating competition in the production of goods and services so that more industries come and invest in the country; having more flexible labor laws so that more people could be part of the labor force; and improving the business environment to attract investment.

But what is also happening in South Africa is that companies that generate jobs find it difficult to find workers that fit their high standards, and workers who don’t have jobs find it difficult to find a job that accepts their limited skills. And this is because of the skill mismatches that exist in the country. So, investing in improving the quality of education is a key element to fighting unemployment and inequality.

Also, while South Africa has well targeted programs to transfer resources to the most vulnerable segments of society, there is a need to improve the delivery system of these grants to ensure that more money goes to the poor.

The report does show that the government has increased its spending in programs like education over the years, but with little to show for it. It says the quality of services, especially in education, is one of the lowest in the region. Why has this increased spending not paid off?

Government spending did not pay off in some areas simply because the funds were not spent efficiently. So, in education, for example, there have been significant increases in teachers’ salaries and benefits, but the problem is that these increases often reflect negotiations with powerful trade unions and not necessarily teachers’ performance. A sizable portion of teachers are not well prepared to be teachers, and that is a problem in terms of the quality of education.

Another problem is that funds are distributed unevenly. Public schools in urban areas receive more funding per pupil than in rural areas. In low-income sectors of the country, even if students don’t pay tuition, they still must spend a lot in transportation, and that has led to more people dropping out of school.

So, despite the increase in spending, South Africa has ranked very poorly in international surveys evaluating educational attainment. That is very sad. The statistics show about half of South African students drop out of school before completing secondary education, and less than five percent of students who start primary school end up with a university diploma. In a country like South Africa that enjoys sophistication in many sectors, particularly in the financial sector, this must change.

The financial sector is interesting in South Africa in terms of technology.  Technology is playing an increasingly important role in providing services to sectors of the population that have traditionally been left out. How is South Africa doing in terms of putting its services online, and how might that affect living standards and the economy in the coming years?

Yes, South Africa is at the forefront of the digital revolution in Africa. This is benefitting banks and allowing more access of the population to financing, thanks to technological advances like mobile banking. Also, the central bank has established a financial technology unit, which is now piloting interbank clearing and settlement of transactions using distributive ledger technology, and is a model on the continent.

Another interesting development with technology is the link between digitalization and governance. For instance, the government is now emphasizing electronic payments of taxes—tax avoidance having become a key issue in South Africa. Customs declarations are now also done electronically, and a new automated procurement system captures data on the beneficiaries of government contracts, which is very good in terms of improving governance in the country.  This system has enhanced inclusivity as well, with a much larger number of smaller enterprises participating in the tender process and getting contracts.

Having said that, I think the use of technology still has a long way to advance in South Africa given the potential of the economy. For example, the cost of internet is high and the quality is low because there are very few competitors. The recommendation of IMF staff is to increase competition in all sectors so that more private companies, domestic and foreign, could invest and compete in the production of services—not only in telecommunications, but also in energy, transport, and other sectors.Improving the quality of education in South Africa is key to fighting unemployment. (photo: iStock by Getty Images/LifeJourneys)

Fuente: FMI

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