🔒 South Africa is a nation defined by “Stagnation and Exclusion” – says Harvard

Harvard University’s Growth Lab reveals a sobering analysis of South Africa’s economic decline, attributing it to the collapse of state capacity and citizens’ distant proximity to job opportunities. Despite three decades of democracy, the nation faces stagnation and exclusion, worsened by government failures post-President Zuma’s rule. The report underscores the crippling impact of power cuts, ailing infrastructure, and a flawed work permit system. While challenges persist, the researchers highlight potential for growth through harnessing metal deposits and solar power, emphasising the need for infrastructure overhaul and urban development.

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South Africa Defined by ‘Stagnation and Exclusion,’ Harvard Says

By Antony Sguazzin

Three decades into democracy the poor performance of South Africa’s economy can be attributed to the collapse of state capacity and the vast distances many citizens live from job opportunities, Harvard University’s Growth Lab said. 

The potential of Africa’s most industrialized nation remains unrealized and its economy is deteriorating, the lab, headed by Professor Ricardo Hausmann, said in a 178-page report that involved two years of research. 

“South Africa’s trajectory is not one of growth or inclusion, but rather stagnation and exclusion,” the researchers wrote.

The report is the latest indictment of government policy that has failed to kick-start the economy after the nine years of rule under former President Jacob Zuma saw the onset of widespread corruption and the collapse of state services ranging from the provision of electricity to the running of ports. Zuma, who was ousted by his own party in 2018, has denied wrongdoing. 

The collapse of state utilities can explain about 40% of South Africa’s growth slowdown even before this year’s increase in the severity of power cuts and woeful performance of its freight rail system, the researchers said. That, they said, has robbed the country of its competitiveness.

“The collapse in state capacity to deliver key inputs has, in effect, squandered the country’s comparative advantage in cheap, coal-fired electricity,” they said. “South Africa is seeing signs of unsustainability in its repeated credit downgrades and large sovereign risk premia. All the while, as growth slows, exclusionary forces are becoming more entrenched.”

The collapse in power supply, which has led to the imposition of almost daily power outages known locally as load shedding by state utility Eskom Holdings SOC Ltd., has created a “spiral of circular debt.”

“The electricity crisis has put additional strains on the system as load-shedding means reduced sales as well as increased consumer dissatisfaction and lowered willingness to pay,” the researchers said. “This chain of debt further undermines Eskom’s finances and increases the need for national bailouts to unburden Eskom’s balance sheet. In the process, municipal capabilities are further weakened.”

Inequality, which the researchers said is the world’s worst, has been exacerbated by the placing of potential workers, mainly Black South Africans, far from potential work places during apartheid. Policy since the end of Whites-only rule in 1994 has only aggravated that, they said. 

“South Africa is exceptional in its human geography, and its spatial patterns undermine growth,” the researchers said. “South African cities are unique in their degree of fragmentation, with long distances between where people live and central business districts.”

A further impediment to growth is a work permitting system that has locked skilled immigrants out of the country at a time when many educated South Africans are leaving.

‘Out of Step’

“South Africa continues to miss out on the benefits of high-skill immigration,” the researchers said. “The country remains out of step with peers who recognize the importance of high-skill immigration as an engine of growth and transformation.”

Still, the researchers argued, the country does have the potential to grow by capitalizing on its vast deposits of metals needed for the global energy transition, such as chromium and vanadium, and by taking advantage of its abundant solar power potential. 

The country will also need to rebuild its ailing electricity system bolster the capacity of failing municipalities and build more densely populated cities, they said.

Another View – Chris Hattingh, head of Policy Analysis at the Centre for Risk Analysis:

By Chris Hattingh

A two-year research project by Harvard professor Ricardo Hausmann’s Growth Lab says that the government’s proposed economic reforms are unlikely to reverse the collapse of state capacity which will continue to be blocked by patronage, ideology, and political gridlock.

SA needs “new strategies and instruments” to achieve its economic growth and inclusion goals.

Based on nine in-depth papers, the report drills down into the reasons for SA’s poor economic performance, which it says is exacerbating exclusion and inequality, and identifies two classes of problems: state collapse and spatial exclusion.

Of these, collapsing state capacity is the “predominant driver of SA’s weakening economic performance and is at the heart of intensifying macroeconomic stress.”

While the government and the investor community have pinned their hopes on structural economic reforms to extract the country from its economic malaise, the Growth Lab says current policies are not working.

In earlier reports, the Growth Lab itself has said the key to growth lies in microeconomic reforms, particularly in the network industries.

Says the report:

We find that current reform momentum is unlikely to reverse this collapse because reforms are encountering systemic, deep-seated, and underlying issues of political gridlock, ideology, patronage, and overburdening state organisations with goals beyond their core missions and capabilities. South Africa needs a strategy to recover state capacity or else slowing growth, and increasing exclusion will continue to worsen.

Among the biggest causes of state collapse are two policies the ANC government has expressed profound commitment to: preferential procurement and cadre deployment. The report recommends that preferential procurement be relaxed for all state-owned entities and that cadre deployment be phased out.

Preferential procurement is a scoring system used by government departments, state-owned companies, and municipalities to give black-owned businesses a leg up in winning government contracts. It intends to redress the economic imbalances of the past, which is provided for in the Constitution.

But, says the report, rather than giving preference to previously disadvantaged groups, small and medium enterprises, and local producers, preferential procurement has undermined economic inclusion in important ways. For example, failing infrastructure excludes and disadvantages the very people and businesses it is intended to benefit.

Reads the report:

In our investigations into the drivers of state collapse in the electricity system and at municipal government level, we find that preferential procurement is a critical component of state collapse and thus deserves serious attention.

The report quotes a 2023 paper by the IMF that estimates that preferential procurement raises government costs for goods and services by 20% or 3% of GDP and has expanded the opportunities for patronage. The “tenderpreneur economy” has benefitted “an exceedingly narrow few at the expense of the rest of society”.

The second class of problems that have weighed down SA’s growth potential is the apartheid legacy of spatial exclusion of the poor, which has been reinforced by the state’s housing and rural development policies. Spatial exclusion makes it difficult for the poor to access opportunities to contribute to the productive economy. Without specific policies to redress spatial inequality, economic exclusion of the black population will endure.

Social grants have not helped in this regard and have been more “palliative than curative”. Grants are a poor substitute for empowering people to participate in the economy.

The report makes specific recommendations to rebuild state capacity and address spatial inequality.

The electricity crisis and the crisis at municipal levels are focused on in a significant amount of detail. Among the suggestions to improve state capacity are:

The urgent liberalisation of the electricity market and faster unbundling of Eskom;

The relaxation of preferential procurement, including in the Renewable Energy Independent Power Producer Programme (REIPPP);

The phasing out of cadre deployment;

The use of the IPP model to expand the distribution and transmission of electricity;

Reallocating responsibility for the distribution of water and electricity to regulated regional companies due to the failure of municipalities to collect charges; and

Connecting municipalities to regional providers of services for which they do not have the skill or capacity.

A range of recommendations are also made with regard to promoting spatial inclusion. These include:

Regulatory changes to enable densification and more compact cities;

Utilising under-used land in urban areas; and

Re-orientating the budget for housing to “more experimental” mixed-use projects

In looking towards solutions to the country’s growth crisis, the report urges the government to take advantage of the opportunities offered by “green growth” in which SA could use its potential to supply the goods, services, and know-how that the world needs.

It provides a detailed exploration of how this could be done, from active industrial policies to better exploit valuable minerals and value chains to the manufacturing of green versions of grey products. The country could also use its considerable technical know-how to export solutions the rest of the world wants.

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© 2023 Bloomberg L.P.

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