FIFI PETERS: The IMF [International Monetary Fund] believes that South Africa could experience stronger growth and bring down its debt at a faster pace if it just gets a few things right. These guidelines were published in its Annual Report on Member Countries on Friday.
Here to discuss the low-hanging fruits that could bolster South Africa’s growth, I am joined by Max Alier, the South Africa senior representative from the IMF. Max, thanks so much for your time. What exactly are these low-hanging fruits that could bolster our growth, according to your estimates, to 3.6% by 2025?
MAX ALIER: Good afternoon, Fifi. We presented in our report an upside scenario in which what we see is an acceleration in the implementation of the structural reforms. I would not call them exactly low-hanging fruit, because they do require actions, real action, and some decisions that may be difficult.
But obviously an important one is progress with, say, the energy situation with Eskom, with the reform for Eskom, and how fast the private producer generators can start providing energy into the system. That is one of the most important bottlenecks in South Africa.
The other one is progress addressing the infrastructure bottlenecks, which have clearly materialised in terms of capacity with the railway system and with the ports system. These two are really important areas.
We have the expectation of it being announced that the spectrum auction that has been long delayed will go ahead in March.
That certainly would be very positive, both because of the investments that we will attract in the near term into the sector, but also going forward it could reduce the cost of data transmission in South Africa and will also facilitate the establishment in South Africa of more industries that really rely on communications.
So these three areas we believe are very important.
FIFI PETERS: On these three I imagine our listeners are thinking it’s nothing new that they haven’t heard. Just last week we had an emphasis from our president at the State of the Nation address that things were being done to address the energy situation with Eskom, things were being done to unlock the infrastructure into the country as well as the spectrum rollout, with the president emphasising he was aware of the delays and that things were being done.
So are you saying essentially that if we actually had to do these things, these three things, we could prop up our growth to 3.6% in two years?
MAX ALIER: Yeah. First, you’re right in pointing out that these are not totally new things in that implementation has been somewhat slow in South Africa over the last few years. So decisive action can have a very positive impact on business expectations and actually start solving the issues that I pointed out about energy, security, and infrastructure bottlenecks.
But the other element that we include in our scenario is faster fiscal consolidation. Now with faster fiscal consolidation public debt will go in a downward path, so the financing needs for the government will go down and therefore there will be more financing available for the private sector. It is a combination of these things that we believe could put South Africa on a higher growth path.
FIFI PETERS: Your report also highlights the need for this country to reduce the footprint that state-owned enterprises currently occupy in the economy. You cite other countries similar to ours in which their state-owned enterprises [SOEs] don’t occupy as much space in terms of economic contribution as ours. So can you just talk to us about that dynamic and what the ideal contribution of SOEs should be for an emerging market like South Africa?
MAX ALIER: Yes. The situation with state-controlled enterprises in South Africa [is] they have been inefficient and [somewhat] ineffective. You can think of energy, load shedding and those things. We know from everywhere in the world that the incentives for public enterprises are different from the ones in the private sector, and these incentives usually lead to inefficient outcomes, because they consider ratios that are driven differently.
We look at the experience, and we know cases like Brazil and China, where even public enterprises have benefitted from opening them to private-sector investors, and also by opening the sector to private-sector competition.
So you may have a state-owned enterprise that will need to face private-sector competition and need to compete on a level playing field.
These inefficiencies that we have observed in South Africa we believe are stumbling blocks in terms of achieving higher growth; but also these public enterprises do require a high level of budget support. They’re a really heavy burden on the budget, and they are responsible to some extent for the increase in public debt that South Africa has witnessed over the last 10 years.
FIFI PETERS: Do you have any state-owned enterprises in mind that are ripe for either privatisation or some form of sales transaction to get them off government’s balance sheet? Is any one in mind that you think could have a positive impact if the government had to let go?
MAX ALIER: I think obviously one we discussed before is Eskom, and opening generation to true competition from the private sector. That we believe is very important.
Transnet – I think there in terms of the board’s management, and there are steps already, I understand. Transnet has asked for private [sector] expressions of interest to participate in the ports, and I understand there are those expressions, so it will help improve the efficiency.
So as for the public enterprises, our view in general is that they need to be assessed, take a look at them, see which of them are viable. If [any is] totally unviable, you may not even be able to privatise it. No one will buy them if they’re not viable. So on those you need to take a different set of decisions.
Now you have the bigger ones and the strategic ones and the interest to open them up to competition in a gradual way, a way that of course is not disruptive to bring in private-sector participation. I think of the big ones; that’s where decisions are perhaps more difficult, that’s where they could have the biggest impact.
FIFI PETERS: Obviously it would have to be done in a way that is right, and just cognisant also of government’s responsibility to provide social goods and services like water and electricity at a rate that the majority of the population can afford, because on the other side there is the argument that too much private participation, while it will create efficiencies, might lock some participants out of the economy by way of price.
But my question then to you is: this 3.6% growth that we can potentially achieve, will it be growth that comes with jobs? In our recent history we have had growth, but that hasn’t necessarily translated to a dent in unemployment.
MAX ALIER: Well, that took us to two questions here. One is the need for some sort of social support for the most needy or the most vulnerable groups in terms of access to issues like water and electricity. We believe that that responsibility from the government is usually better discharged in the form of clear, explicit subsidies that show in the budget.
You may have a private supplier, a private company that produces that, and the government will provide clear and transparent subsidies targeted to those people. The subsidies of this support to these groups of the population do not need to be at the expense of undercharging for the services of the state-owned enterprise. Your producing all these subsidies first of all usually ends up being untargeted, and they end up being untransparent.
The second element of your question is that you mentioned South Africa had growth and had not generated jobs. I tend to disagree on that.
South Africa’s growth has been really, really low for decades. Let’s leave Covid aside, which of course made things worse.
South Africa’s income per capita declined for five or six years in a row before Covid. It’s very difficult for any country under those circumstances to tackle poverty and to tackle inequality and to generate jobs.
We believe that these market reforms of the SOEs that I was mentioning before should be complemented, as we note in our report, by reforms to the labour market. You need to remove impediments that hinder job creation, and we believe those are substantial.
There are many issues related to this. We have a full [inaudible] there, and there are issues related to education and skills, which are important to upgrade so as to have the right skills for people with the right education.
But also there are issues related to hard collective bargaining in the system. I noted in the State of the Nation Address, the Sona by the president, he made a reference to – I don’t have the precise words – something like adapting labour regulations for small and medium enterprises. I think that that could be an important step because what we know from everywhere in the world is that jobs are generated by small and medium enterprises, not generated by the big corporations.
Big corporations are good, are very important for many reasons, but usually it is the more medium enterprises which are the ones that drive growth, and grow job growth creation in the system.
FIFI PETERS: When it comes to labour reform, what about the recent announcement that our minimum wage would be increasing next month? What does the IMF think about that and, added to that question, just the talks regarding a stronger social security system in the form of a basic income grant? If you throw those two elements into some of your formulas right now, what picture then does it create for South Africa’s economy?
MAX ALIER: On the minimum wage what I can say in general terms there is a role for minimum wages. But if you increase the minimum wage – and I’m not making a comment on the specific amounts [in] South Africa, I’m not fully aware of these elements – but if you go to a minimum wage increase, on that, yes, a few people will get higher wages, but you will get more unemployment. So it’s a very delicate balance that needs to be achieved when you touch on the minimum wage.
On the second element, the basic income grant, what was announced last week by the president is that government plans to extend the grant that was created in the context of the pandemic for another year. We are of the view there are obviously groups in societies that do need support, and it is important to provide this support. That’s definitely important.
The issue with the basic income grant or whatever transfer you do, you need to do it in an affordable way. South Africa right now has a high level of public debt. It is important in part to achieve the scenario we were discussing before, of having more growth to put the debt on a downward path. So it’s fine if in any government the priorities change over time.
Right now the priority may be to provide additional support to the groups, but they are a trade-off and they need to find ways to accept this, because not everything can be a priority. So obviously there is a role for that.
But the most important point I think is that all these transfers are short-term solutions. You need short-term solutions for groups that do need this support. However, if you look medium and long term, the real solution to poverty, to inequality, is really to create an environment that makes investment more dynamic to generate growth and lead to job creation, because that’s what will be among solutions to the poverty and inequality issue that South Africa faces.
FIFI PETERS: All right, Max, thanks once again for your time, sir. We’ll leave it there. Max Alier is the South Africa senior representative at the IMF.