Can the National Treasury reverse structural decline through enabling infrastructure?

South Africa’s economic indicators:

All point to an economy that is performing below its potential and in structural decline. Without robust growth, the label “emerging market” rings hollow. Whilst most leading emerging markets have been severely impacted the past two years through the COVID-19 pandemic, their growth trajectories are now becoming steeper with sustainable recoveries underway.

Many will respond with an ideologically tinged argument to my oft repeated assertion that there is no problem that a constant 5%+ GDP growth rate can’t solve. But this is South Africa’s problem; how to achieve higher growth rates beyond the paltry 2%-odd forecast? Urgent budget reform is needed to redirect government spending towards key enablers of economic growth.

Operation Vulindlela is an initiative of the Presidency and National Treasury to drive structural reform - or as I define it - reform that is politically difficult to do and which challenges accumulated vested interests. How the treasury allocates its budget will reflect the (shifting) economic priorities.

What then is to be done to support growth? In a publication of a few years ago, I posed the question if countries can structurally reform without a crisis, and importantly, has South Africa experienced a sufficient crisis to carry out the bold reforms that the state-owned sector of our economy so desperately requires? Ours is not a cyclical crisis, but a structural one that has been deeply worsened through the pandemic.

Structural reforms or supply-side interventions are required to address issues such as the lack of business confidence, labour market problems, poor governance, barriers to market entry, huge regulatory burdens and large infrastructure gaps. In the South African context, while many of these issues apply, the infrastructure gap is of particular concern. Successful countries are those that prioritise investment, not consumption.

The right infrastructure investment has the potential to reap large returns and benefits by stimulating the economy, enhancing overall productivity and creating the capacity for the economy to grow going forward. Enabling infrastructure can also play an important role in driving regional integration as intra-regional transport networks allow for the flow of goods and people. This enables the development of cross-border supply chains and the expansion of markets.

In 2008, South Africa was (only) investing an equivalent of 23% of GDP in infrastructure, and this was relatively high considering the lead up to the 2010 FIFA World Cup finals. Since this time, there has been a slow burn decline. The rule of thumb suggests that a country should be investing the equivalent of approximately 30% of GDP to underpin its developmental needs. As a stand-out example, China has invested over 40% of GDP annually for more than a generation. By June last year, South Africa’s investment accounted for just 12.5% of nominal GDP.

Ironically South Africa has all the necessary features to enable this crucial economically enabling investment in infrastructure – a strong banking sector, development finance institutions, a growing and young population encouraging demand for infrastructure, regional connectivity, and rapid urbanisation. Of course, directing capital through the budget toward key infrastructure programmes will unlock economic growth. But it is not so much a financing challenge as it is an imperative to liberalise and allow private capital to invest in traditionally controlled state-owned infrastructure. I would argue that policy liberalisation would have an even greater impact than capital spend on driving growth. The recent opening of the power sector to private generation is an excellent example of this. As policy liberalises, capital naturally flows toward the opportunity.

Since the National Treasury already faces fiscal policy constraints due to high debt levels and servicing costs, such reform does not cost anything - it’s free in fact. Competition always drives efficiency and this in turn will result in more competitive infrastructure systems emerging.

True structural reform will not just remedy the obvious financial risk that we face, but also provide the necessary confidence to domestic and foreign capital to invest for the long term in our economy.

Without deep structural reform, South Africa will underperform in growth terms going forward and will increasingly diverge from the global emerging market macro. To counter this, the budget needs to be coupled with a strong policy liberalisation agenda in order to promote a renewed growth path for the economy.