Investec economist warns SA about fiscal dangers

South Africa has to tread carefully not to slip into the euro zone like crisis in its path to address apartheid legacies via the heavy social welfare avenue.

This can be read from a piece penned by Investec economist Annabel Bishop. The piece is titled as follows: “Infrastructure outlook: noticeable service delivery has occurred but greater private sector involvement is needed with reduced state control”.

Bishop is pushing for a more pronounced role of the private sector in South Africa’s development path using an ideal she terms ‘economic freedom’ which she says is “defined by the Heritage foundation as the rule of law (property rights and freedom from corruption), regulatory efficiency, limited state intervention and open markets”

Her view clearly stands against the push by leftist partners of the ruling party who want an even more economically active state. Bishop’s view also stands against the hogging of cash (more than R500bn) by the South African private sector. But then she points out that “The enabling environment for doing business also needs to improve substantially in South Africa. Companies need to be able to price future risk, both those already operating in South Africa and foreign investors looking to fixed investment. Until companies can filter out political noise and ascertain which government policy proposals will become reality they will hold back on investment and job creation, hamstringing economic growth”.

Back to the fiscal debate, Bishop says there are serious risks for governments that “try to do everything, from comprehensive social welfare provision to attempting to bring unemployment down to low single digits”.

The alternative, says Bishop is to focus on enabling the private sector to create employment and financially secure individuals.

She says governments which try to do everything become financially unsustainable. “Financially unsustainable governments eventually deliver less and less, to the point where they can no longer provide welfare or pay their civil servants. This is the crisis playing out in the euro zone. Countries such as Greece created bloated and expensive civil services, with deep and comprehensive welfare benefits for the population that proved unaffordable.

“Germany and other wealthy euro members are now bailing out bankrupt Greece, Portugal and Ireland, and are in the process of beginning Spain’s bailout. South Africa needs to remember it has no-one to bail it out. Indeed, Lesotho and Zimbabwe, both countries with low levels of economic freedom and high levels of state control, rely on SA for financial support”.

She adds that fiscal sustainability rests on the creation (and competitive taxation) of a strong and highly profitable private sector, with social welfare a temporary phenomenon to bridge the gap over the next decade until the bulk of the population can become self supporting. “This is how countries become wealthy, and sustainably eradicate poverty and reduce inequality and unemployment”.

 

Bishop notes that “The rise in economic freedom in South Africa since 1994 has meant that after tax income now averages R24 490 per person (excluding inflation), compared to 1994’s R17 320. This has essentially doubled real tax revenues, affording the considerable expansion of the social welfare net…”

She noted that South Africa has achieved a lot in the way of lifting people out of poverty since 1994. “The number of households with access to electricity has increased, from 5.2 million to 11.9 million, or by 127.9%, between 1996 and 2010”.

“The SAIRR further states that the proportion of all households with access to electricity increased from 58% to 83%. Access to piped water has also increased, from 7.2 million households to 12.7 million, or by 76.6% bringing the proportion with access to piped water from 80% to 89%. This means that together with increased access to social welfare transfer payments, which now cover 16 million people out of a population of 50 million, the proportion of South Africans living on less than $2/day has declined from 12% in 1994 to just 5% today (SAIRR data)”.

 

However notes Bishop, many South Africans remain in abject poverty, and for those left behind, service delivery has clearly been too slow. “It is impossible to sustainably eradicate the legacy of apartheid (in a manner that is fiscally sustainable and so does not result in eventual political unrest and overthrow) in a short space of time. Indeed, it is important to note that the service delivery protests (which combined with the mining strikes this year) are not a function of the failure of service delivery, but rather of its success and remaining inequality”.

She says the marked success has created expectations amongst those either waiting for their own services, or who are dissatisfied with other areas of delivery.

“To propel growth and reduce unemployment SA needs even more economic freedom, defined by the Heritage foundation as the rule of law (property rights and freedom from corruption), regulatory efficiency, limited state intervention and open markets”.

Bishop notes that “South Africa has already experienced significantly faster growth under the ANC (3.3% a year since 1994) than in the eighteen years prior to 1994 (growth averaged only 1.6% y/y), and living standards for the poorest have improved significantly (higher individual ownership of goods and use of services)”.

The size of the real economy has also virtually doubled. These successes have come on the greater degree of economic freedom followed once apartheid was abolished. As the entire population obtained the right to self determination, from choosing where to live, work and invest, to what to consume, own (including land) and trade, the economic potential of South Africa was raised”.

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