The coronavirus has affected the entire global population, with more than 4 million people confirmed to have contracted the virus, and the number of infected individuals growing every hour.
The Covid-19 crisis has also choked off the world economy, with developing economies such as South Africa bearing the brunt due to its pre-coronavirus structural economic faults. South Africa is facing the dual challenge of saving livelihoods from a deadly virus whilst sustaining and growing its frail economy.
Its economy has been bleeding for a prolonged period, with the economic growth rate averaging just 2.3% per annum in the past 15 years. Slow growth has kept the country in a middle-income trap, with no tangible prospect of graduating into higher income status.
Some structural faults holding South Africa in a middle-income trap include the inability to inspire entrepreneurial spirit or attract investments and ensure inclusivity in sectors like energy, agriculture and manufacturing, where oligopolies distort market efficiencies.
Rating agencies have responded by downgrading the country’s sovereign credit rating to junk status, citing its failure to institute required structural reforms to redress inequality and enhance fiscal prudence.
The limits to structural reforms
Noticing dwindling investor confidence in the economy, Minister of Finance Tito Mboweni said that the time is ripe to make bold structural reforms. He even announced a creation of a unit in his ministry to drive structural reforms. Most of these were driven by a focus on gaining efficiency, such as privatising dysfunctional state-owned entities (SOEs), increasing competition in energy and transport sectors, expanding exports of labour-intensive commodities, rolling out broadband and promoting tourism.
These reforms will stimulate short term growth, job opportunities and bring stabilisation of the fiscus. Despite the likely short-term gains, however, these reforms might not provide higher economic growth rates for a prolonged period required to reduce inequality and uplift South Africa out of a middle-income trap.
This is because they are unlikely to open up opportunities for new players in the formal economy and will do less damage to increasing levels of poverty and inequality in the country. Lizzie Collingham, in her book The Taste of War, articulates that death by starvation is slow, undramatic and lacking heroes, as compared to war deaths. However, its impact on societies is much more devasting, with lasting effects. Similarly, in South Africa, the current economic structures as well as pronounced reforms will lead to more poverty-related deaths, as more and more people will still be excluded from the formal economy.
Trade policy: the key to winning the war
To effectively develop and grow the economy, structural reforms must first deal with trade policy. Unfortunately, reforms announced by the National Treasury and other economic state organs are silent on a trade policy and its impact on industrialising the economy.
The current trade policy is constraining industrialisation and benefiting few sectors that are better organised, with stronger lobbying voices, such as the automobile and renewable energy.
The regressive trade policy can be attributed back to South Africa’s decisions taken during the Uruguay Round of multilateral trade negotiations in the early 1990s. During these negotiations, South Africa opted for a developing country status and undertook tariff reforms obligations designed for a developing nation. This led to the country cutting its average tariff from 23% to 8.2% with a proportion of zero-rated tariff lines rising to 54%.
The country also simplified its tariff schedule dramatically, reducing tariff lines from 13 609, where 28% were subjected to import controls in 1990, to 6 420 tariff lines, with no import controls by 2006. Since 2006, the manufacturing sector has only managed an average growth rate of 1.5% per annum, with the last five years averaging just 0.1% per year.
Over and above radical tariff reforms in 1995, South Africa adopted a trade policy management approach that manages tariffs on a sector by sector basis, dictated by the needs and imperatives of a specific sector strategy.
Essentially, the state delegated its functions of reforming trade to each sector, implying each sector must go through a self-discovery journey then comes back to government for optimal tariff setting. This uncoordinated trade policy management has led to some sectors benefiting at the expense of other sectors, for example, poultry and automobiles, during the negotiations of AGOA (the African Growth and Opportunity Act). It is partly this strategy that has limited the success of the Industrial Policy Action Plan in the past decade.
It is important to acknowledge benefits of adopting an open trade policy in the early 1990s, which led to more export markets for agricultural, mining and manufacturing products. However, the manner and speed in which the trade reform was implemented eroded most of domestic industrialisation capabilities.
Today, the manufacturing sector has idling capacity at best, only utilising 80% of installed manufacturing capacity while importation of textile, equipments and other goods are growing every year. Similarly, the agricultural sector is producing and exporting raw material yet importing large volumes of processed food such as juice, meat and prepared food.
International experience shows that industrialised nations have used trade policies as tools to drive industrialisation and develop their respective economies to a point where they were able to escape the middle-income trap.
In South Africa, there was a radical reform of trade policy which decimated the domestic industrialisation capacity subsequently leading to a bloodshed of small and medium companies in manufacturing and agriculture sectors over the past 20 years.
This is the root cause of a growing unemployment and reducing tax base problem in the country. Most South Africans strongly believe that the Covid crisis has brought a window of opportunity to implement structural reforms to boost economic growth and development.
However, such structural reforms must first review and reposition trade policy to support domestic industrialisation.
Dr Sifiso Ntombela is chief economist at the National Agricultural Marketing Council (NAMC). Views expressed are his own.