World Bank Report: An Incomplete Transition: Overcoming the Legacy of Exclusion in South Africa

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Finance Standing Committee

14 August 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with the World Bank for a presentation of South Africa’s Systematic Country Diagnostic, based on the latter’s Report entitled: “An Incomplete Transition: Overcoming the Legacy of Exclusion in South Africa”.

The World Bank noted that South Africa’s transition remained incomplete as the legacy of exclusion persists, in spite of progress since 1994. Five key constraints were identified as follows: insufficient skills; the skewed distribution of land and productive assets, and weak property rights; low competition and low integration in global and regional value chains; limited or expensive spatial connectivity and under-serviced historically disadvantaged settlements; and climate shocks: the transition to a low-carbon economy and water insecurity.
The legacy of exclusion makes it difficult to build a social contract. Symptoms of the weak social contract include low investment, low growth, unemployment, a volatile exchange rate, student protests, rating downgrades, crime, and state capture. Notably, creating jobs, especially for young people, was critical to overcome the legacy of exclusion. Jobs are also important to build a stronger social contract. Large-scale job creation reduces economic vulnerability and helps transform the economy to become more representative of the population. To create more jobs, the economy needs to grow much faster than it has since 1994. But the legacy of exclusion in land, labour, capital, and product markets hampers growth. At the same time, high inequality and the legacy of exclusion fuel the contestation over resources, increasing policy uncertainty and deterring investment, while also undermining the financial stability of state-owned enterprises and their ability to provide quality public services. This too, has weighed on growth. When the distribution of income and assets is contested and a large number of citizens is excluded from job opportunities to join the middle class it puts pressure on the social contract—a fragile social contract is a symptom of the incomplete transition.

One of the key proposals by the World Bank was the creation of a social contributory pension fund which would allow South Africans to build assets. It would compel savings and allow recipients to receive dividends. Priorities to strengthen policy implementation would include the following: continual tackling of corruption; strengthening accountability for performance; reducing fragmentation of programs; strengthening corporate governance in SOEs; limiting unintended consequence of policies; strengthening the capacity of the civil service; strengthening the capacity of civil society to hold government accountable; and enhancing participation of the private sector in service delivery.

Members noted that there was little mention about government’s current strategy to deal with economic exclusion- the Broad-Based Black Economic Empowerment (BBBEE) policy. They asked why not much had been said about the policy. Was there an intention to have a much detailed analysis at a later stage? Further, the World Bank’s structural adjustment programmes had contributed to inequality so it could not meaningfully contribute to a debate on how to lessen poverty and inequality in South Africa. It would be foolhardy to even consider what it had to say. Instead, it should explain its failures, which had exacerbated poverty. What was the World Bank’s position on the expropriation of land without compensation on the backdrop of inequality and exclusion of the majority in the mainstream economy?

The Chairperson said there was deep concern over the role the World Bank has played and it needed to take responsibility for its failures in the developing world. Its policies of structural adjustment, which, in South Africa, had taken the form of the Growth, Employment and Redistribution programme (Gear) had failed dismally, and had contributed to poverty and inequality. He was taken aback by the World Bank proposal about the private sector having a greater role in policymaking, noting that, the private sector had too much say in policy but had not come to the party in terms of partnerships and investment. So far, it has had a huge say but had delivered very little. He added that the World Bank’s approach over-emphasised the free market and did not recognise the need for state intervention. He recognised the quality of the Diagnostic Report but also noted its paucity in terms of policy prescriptions

Meeting report

The Chairperson welcomed everyone and noted that various stakeholders and activists, especially within the ANC, have an ambivalent attitude towards the World Bank. He welcomed the presentation by the World Bank.

World Bank presentation
Dr Marek Hanusch, Senior Economist, World Bank, presented the Systematic Country Diagnostic for South Africa, based on the World Bank Report: “An Incomplete Transition: Overcoming the Legacy of Exclusion in South Africa”. South Africa’s transition remained incomplete as the legacy of exclusion persists, in spite of progress since 1994. Five key constraints were identified as follows: insufficient skills; the skewed distribution of land and productive assets, and weak property rights; low competition and low integration in global and regional value chains; limited or expensive spatial connectivity and under-serviced historically disadvantaged settlements; and climate shocks: the transition to a low-carbon economy and water insecurity.

 A number of symptoms link to these root causes, aggravating the impact on poverty and inequality. Jointly, they undermine fiscal, external, and financial sustainability. The contestation over resources finds many legal manifestations. They include BBBEE and land reform, as well as competition for fiscal resources: #FeesMustFall is putting pressure on the budget as students demand resources for the key to the middle class: a university degree. The NHI attempts to address the high disparity in the quality of health services, also putting pressure on the budget. Public sector unions’ demand higher wages—essentially redistribution from taxpayers to civil servants. All these spending pressures are weighing on the budget, making it difficult to contain the fiscal deficit, especially in an environment of low growth, when the contestation over resources intensifies while revenue growth slows. This is aggravated by illegal forms of resource contestation, such as corruption. Jointly, these various types of expenditure pressures are making it more difficult to maintain fiscal sustainability. A high budget deficit in turn is reflected in a high current account deficit, undermining external sustainability. The current account deficit is largely financed with volatile portfolio flows. Shocks such as domestic policy uncertainty make the rand a highly volatile currency, which in turn becomes a constraint for much needed long-term investment. Finally, weakening sovereign and SOE creditworthiness raises borrowing costs throughout the economy. It becomes a concern for banks, which hold much of the public bond portfolio, posing a threat to financial sustainability. This is further aggravated by the threat of land expropriation without compensation undermining collateral.

The legacy of exclusion makes it difficult to build a social contract. Symptoms of the weak social contract include low investment, low growth, unemployment, a volatile exchange rate, student protests, rating downgrades, crime, and state capture. Creating jobs, especially for young people, was critical to overcome the legacy of exclusion. Jobs are also important to build a stronger social contract. Large-scale job creation reduces economic vulnerability and helps transform the economy to become more representative of the population. To create more jobs, the economy needs to grow much faster than it has since 1994. But the legacy of exclusion in land, labour, capital, and product markets hampers growth. At the same time, high inequality and the legacy of exclusion fuel the contestation over resources, increasing policy uncertainty and deterring investment, while also undermining the financial stability of state-owned enterprises and their ability to provide quality public services. This too, has weighed on growth. When the distribution of income and assets is contested and a large number of citizens is excluded from job opportunities to join the middle class it puts pressure on the social contract—a fragile social contract is a symptom of the incomplete transition.

One of the key proposals by the World Bank was the creation of a social contributory pension fund which would allow South Africans to build assets. It would compel savings and allow recipients to receive dividends. Other policy options were as follows:

Insufficient skills
Strengthen nutrition and early years intervention
Expand affordable university access; encourage entry of private universities
Reform TVET system, incl. stronger collaboration with the private sector, and prepare labour force for structural change, incl. low-carbon transition

Skewed distribution of land and productive assets, and weak property rights
Strengthen tenure security and capacity for land reform
Strengthen extension services, financing, training, access to inputs and capital equipment, and marketing and transport infrastructure for small-scale and emerging farmers
Make BEE more broad-based; strengthen BEE accreditation system; evaluate and limit unintended investment impacts of BEE

Low competition and low integration in global and regional value chains
Implement sustainable mechanisms to embed competition principles in sector/market rules and regulations (incl. trade tariffs) and in the design of trade, energy, and industrial policies
Strengthen investor-friendly regulation and attract foreign direct investment
Foster supply chain development / localization, including in agribusiness and automotive; support financing for supply chain development

Limited or expensive connectivity and under-serviced historically disadvantaged settlements
Foster strategic densification of cities (esp. secondary cities) and diversification of land use
Better integrate transport planning and land use, strengthen intermodal transport, and strengthen regulatory framework in support of competition in minibus taxi sector

Climate shocks: transition to low-carbon economy and increasing water insecurity
Carbon pricing (carbon tax and carbon budget)
Leveraging private investment in energy conservation, and clean energy generation technologies (e.g. renewables and natural gas)
Strengthen regulatory and investment framework for more resilient and efficient water service delivery
Incentivize consumers to use water efficiently (e.g. through cost-reflective pricing)

Priorities to strengthen policy implementation would include the following: continual tackling of corruption; strengthening accountability for performance; reducing fragmentation of programs; strengthening corporate governance in SOEs; limiting unintended consequence of policies; strengthening the capacity of the civil service; strengthening the capacity of civil society to hold government accountable; and enhancing participation of the private sector in service delivery.   

Discussion
Ms G Ngwenya (DA) noted that there was little mention about government’s current strategy to deal with economic exclusion- the Broad-Based Black Economic Empowerment (BBBEE) policy. She asked why not much had been said about the policy. Was there an intention to have a more detailed analysis of the policy at a later stage? She sought clarity about the social contributory pension scheme recommended by the World Bank.

Mr F Shivambu (EFF) said the World Bank’s structural adjustment programmes had contributed to inequality so it could not meaningfully contribute to a debate on how to lessen poverty and inequality in South Africa. It would be foolhardy to even consider what the bank had to say. Instead, it should explain its failures, which had exacerbated poverty. On the bank’s proposal that the private sector have a greater role in policymaking, he pointed out that whenever there was a shift in policy, the private sector almost always argued for retaining the status quo. The World Bank is an instrument of US foreign policy whose intention was to integrate developing countries into the global economy as mere suppliers of raw materials. Virtually all its interventions in developing countries had been disastrous and had left societies worse off. 

Mr A Lees (DA) asked for the World Bank’s view on Skills Education and Training Authorities (SETAs) and their performance in relation to skills development. The general view was that their huge bureaucracies were eating up large revenue streams. On the status of State-Owned Entities, did the World Bank’s analysis consider them in terms of their contribution to economic growth, and whether they should even exist at all?

Ms P Nkonyeni (ANC) asked about the rationale of the diagnostic report given that the ANC had clear positions on all the issues raised. Was the World Bank seeking to influence government policy? What was its position on the expropriation of land without compensation on the backdrop of inequality and exclusion of the majority in the mainstream economy? She failed to understand why the establishment of private universities was being encouraged.

Dr Dumisani Jantjies, Deputy Director: Finance, Parliamentary Budget Office, felt the World Bank’s report should have interrogated the role of the financial sector in the incomplete transition. In recommending that the role of the private sector be more pronounced, how would it be ensured that this does not undermine democratic tenets?

Mr Seeraj Mohamed, Deputy Director: Economics, Parliamentary Budget Office, said a major part of the story was missing in the World Bank’s diagnostic report, particularly the historical analysis. There was need for an in-depth analysis on what path dependency had meant for inequality. Also, the historical role of big business and the financial sector within the mainstream economy and its implications on broad-based economic development would have been explored further. An analysis of the multigenerational impact of misallocation of resources and labour linkages was also important.

The Chairperson felt the World Bank’s analysis was rather too subjective. A significant number of ANC activists of his generation would agree with Mr Shivambu. There was deep concern over the role the World Bank has played and it needed to take responsibility for its failures in the developing world. Its policy of structural adjustment, which, in South Africa, had taken the form of the Growth, Employment and Redistribution programme (Gear) had failed dismally, and had contributed to poverty and inequality. He was taken aback by the World Bank proposal about the private sector having a greater role in policymaking, noting that, the private sector had too much say in policy but had not come to the party in terms of partnerships and investment. So far, it has had a huge say but had delivered very little. He added that the World Bank’s approach over-emphasised the free market and did not recognise the need for state intervention. He recognised the quality of the diagnostic but also noted its paucity in terms of policy prescriptions.

Dr Hanusch replied that the World Bank had been very open about the mistakes it had made in the past. The private sector should be involved in policymaking as it was a partner in the country’s National Development Plan and was the main generator of jobs. The private sector needed to grow to create jobs but it also needed to be held accountable, regulated, and play within the rules of the country. It was important that policies do not have unintended consequences that could prevent job creation. He stressed the critical importance of arriving at an amicable solution for the mining charter, given that investments in the sector will play a critical role in future growth. The issues raised were not particularly novel because they were born out of extensive consultation with stakeholders within South Africa. The bank would make efforts to understand the BBBEE policy better. The challenge had been that there were no meaningful studies on the impact of the policy found during consultations. Therefore, as an evidence-based institution, the bank could not have an opinion on the policy at this stage. However, it felt the BBBEE policy was not broad-based. A contributory pension scheme to enable asset building- thus stimulating economic growth would be a more viable alternative. On SOEs, the bank believed there should have well-defined mandates, and be exposed to meaningful competition; especially those which have deep and dominant supply chains. On land reform, the bank is clear that it should be implemented within a regime that recognises property rights. Lastly, the World Bank has no intention to influence government policy, as it does not have any agenda.

The Chairperson thanked everyone for their inputs and indicated the Committee would need to apply its mind on the nature of engagements with the World Bank going forward. He would confer with other committees falling under the economic cluster as well.

The meeting was adjourned.

 

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