The Future of the South African Political Economy Post-COVID 19 (International Political Economy Series) 3031105753, 9783031105753

Table of contents :
Acknowledgments
Contents
Notes on Contributors
List of Figures
List of Tables
1 Introduction: Responding to Pandemics and Economic Challenges: Policy Choices Post Covid-19
2 Reconstruction in the Aftermath of Global Health and Economic Crises: Historical Lessons for South Africa
Introduction
The Spanish flu (1918–1920) and South Africa
Severe Acute Respiratory Syndrome—SARS (2002–2004)
Economic Crises
The Great Depression of 1929
Effects
State Policy Responses
South Africa and the Great Depression
The 2008/2009 Great Recession
Effects
State Responses
Effects of Interventions
South Africa and the Two Crises: The Great Recession and the COVID-19 Pandemic
Lessons for South Africa
Health Crises
Economic Crises
Conclusion
References
3 Building State Capacities and Dynamic Capabilities to Drive Social and Economic Development: The Case of South Africa
Introduction
The Conceptual Lens: Long-Term Capacities, Dynamic Capabilities, Innovation, and Developmental Missions
Importance of Public Value
Public Sector Capacities and Capabilities in South Africa: Diagnosing the Challenges and Opportunities
State Capabilities and State-Owned Enterprises
Importance of Institutional Quality and State Capabilities
Weak Institutional Capabilities at the Local Government Level
Using the District Development Model to Promote Public–Private Partnerships
Digital Transformation as Mission-Critical Outcome
Conclusions and Recommendations
References
4 COVID-19 and Beyond: Rethinking Industrial and Competition Policy
Introduction
Industrial Policy—Principles, Experiences, and Outstanding Issues
Learning from the History of Late Industrialization
Outstanding Issues and Challenges for Industrial Policy
The South African Approach to Competition and the Need to Rethink It
An Industrial Policy/Competition Policy Nexus in South Africa?
Discussion
Conclusion
References
5 Monetary and Fiscal Policy Challenges Posed by South Africa’s Deepening Economic Crisis and the COVID-19 Pandemic
Introduction
What Does a Flat Phillips Curve Mean for Monetary and Fiscal Policy Co-ordination?
Why is Low and Stable Inflation Important for the Co-ordination of Monetary and Fiscal Policy?
Childcare and Unemployment Income Grants
Conventional Monetary Policy and Financial Regulation Interventions
Bond Purchases by the South African Reserve Bank
The Loan Guarantee Scheme by the National Treasury, SARB, and the Banking Association
Other Central Bank Balance Sheet Tools that the SARB Can Use to Propagate the Effects the Effects of Conventional Monetary Policy, Macro-Prudential and Financial Regulatory Tools
The Accumulation of Foreign Currency Reserves
Open Market Operations in the Form of Repurchase Agreements
How Do We Deal with Excess Reserves Generated in the Process of Large-Scale Asset Purchases and Forex Reserves Accumulation?
How Do We Raise Output Growth Over the Medium and Long-Run and Close the Revenue and Expenditure Divergence?
The Role of Accelerated Land Reform, Redistribution and an Increase in Hectares Planted in Increasing Potential and Actual Output
The Mining Sector and Minerals Beneficiation as an Approach to Raise Potential and Actual Output
The Manufacturing Sector as a Driver of Output and Employment Growth
Conclusion
References
6 The Short-Term Labor Market Effects of South Africa’s National COVID-19 Lockdown
Introduction
Results
Aggregate Shifts in Key Labor Market Indicators
Variation in Labor Market Outcomes Within and Between Groups
Multivariate Analysis: Estimating the Probabilities of Transitions in Labor Market States
Conclusion
References
7 Social Security and Social Protection in South Africa
Introduction
What Has the COVID-19 Pandemic Revealed?
Definition of Social Security and Social Protection
The Bill of Rights and Its Implications
Progressive Realization Versus Immediate Availability
Adequacy of Social Security in South Africa
Inequality and Redistribution
Gaps in Protection
Overview
Formal and Informal Social Protection
Protection of Households and Children
Unemployment
Old Age, Death, and Disability
Institutional Gaps
Recommendations
Conclusion
References
8 Repositioning State-Owned Enterprises (SOEs) and Development Finance Institutions (DFIs)
Introduction
Assessing the State of SOEs and DFIS
An Overview of SOEs
The PRC Assessment
The NPC Assessment
An Overview of DFIs
A Sample of DFIs: Profiles, Mandates, and Scope
Assessing DFIs’ Roles and Functions
The Comparative Experience: What Can SA Learn?
The SOE Dimension
The Problem of Models
The Problem of Sectors
The DFI Dimension
Governance of SOEs, DFIs, and the Private Sector: Toward a PPP Framework
Two Perspectives: The ANC and B4SA
PPP Quality and Performance: Principles and Practice
OECD Principles for PPPs
Policy Recommendations
Recommendation: Cluster One
Recommendation: Cluster Two
Conclusion
References
9 Energy Transition for Post-COVID-19 South Africa
Introduction
The Importance of Electricity to the South African Economy
Consequences of Unreliable Electricity Supply
Environmental Requirements and Technological Changes Taking Place in the Electricity Sector
The Growing Tide of Renewable Energy Technologies
Key Macroeconomic Considerations as the Country Makes Its Energy Transitions
Socioeconomic Benefits to be Derived from the Energy Transition
The Fiscus
Municipalities and Energy Transition
Regional Energy Dynamics and Opportunities
Conclusion and Policy Recommendations
References
10 Future of Energy in South Africa and Prospects for Building Regional Value Chains
Introduction
An Examination of South Africa’s Energy Sector
Drivers and Opportunities for Renewable Energy Deployment in South Africa
Challenges Facing Renewable Energy Deployment in South Africa
Strategies and Policies for Renewable Energy Deployment in South Africa
Policy Proposals for Renewable Energy in South Africa
Fixing Energy Prices and Targets
Policy Scenarios
Option 1: Electricity Feed-In Tariffs (FIT)
Option 2: Renewable Electricity Portfolio Standards
Option 3: Renewables Obligation
Comparing Policy Options
Creation of Regional Energy Value Chains as a Strategy for Renewable Energy Development
Steps and Measures to Be Considered by South Africa for Green Coal Policies
The Role of Gas in Renewable Energy Transition
Experiences in Transiting to Renewable Energy
Conclusion
References
11 The Digital Divide in South Africa: Insights from the COVID-19 Experience and Beyond
Introduction
COVID-19 and Lessons on the Need for Digitalization in South Africa
Business and Digitalization
The Education Sector and Digitalization
Digitalization in South Africa—Recent Progress
Internet Penetration in South Africa—Access and Use
Spatial Inequalities and Internet Penetration Rate
Growth in Smartphone and LTE Devices
Access vs Usage
Internet Users’ Profile in South Africa
Key Drivers of Inclusive Uptake of Digital Services in South Africa
Affordability
Digital Literacy
Fit for Purpose Content
Actions for Inclusive Digitalization
Pricing and Tax Policies for Inclusive Digital Transformation
Digital Taxation
Innovative Interventions
Spectrum That Can Enable New Business Models
Conclusion
References
12 From “Crisis Compacting” to Resilient Social Contracts: Emerging Lessons from COVID-19
Introduction: COVID-19, Building Back Better, and Resilient Social Contracts
Drivers of Resilient Social Contracts and Effective COVID-19 Response
Forging Resilient Social Contracts
COVID-19 Response and Success—What Are We Learning?
Lessons and Insights for Strengthening Social Contracts in Times of Crisis
Three Synthesis-Framing Priorities
Place Social Cohesion at the Center of Policy Design and Implementation
Conclusion: Implications for South Africa
References
13 Conclusion: Building a Resilient State and Inclusive Society
Bibliography
Index

Citation preview

The Future of the South African Political Economy Post-COVID 19 Edited by Mzukisi Qobo · Mills Soko · Nomfundo Xenia Ngwenya

International Political Economy Series

Series Editor Timothy M. Shaw , University of Massachusetts Boston, Boston, MA, USA; Emeritus Professor, University of London, London, UK

The global political economy is in flux as a series of cumulative crises impacts its organization and governance. The IPE series has tracked its development in both analysis and structure over the last three decades. It has always had a concentration on the global South. Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe. An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies. It informs diverse policy communities as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise. NOW INDEXED ON SCOPUS!

Mzukisi Qobo · Mills Soko · Nomfundo Xenia Ngwenya Editors

The Future of the South African Political Economy Post-COVID 19

Editors Mzukisi Qobo Wits School of Governance University of the Witwatersrand Johannesburg, South Africa

Mills Soko Wits Business School University of the Witwatersrand Johannesburg, South Africa

Nomfundo Xenia Ngwenya Wits School of Governance University of the Witwatersrand Johannesburg, South Africa

ISSN 2662-2483 ISSN 2662-2491 (electronic) International Political Economy Series ISBN 978-3-031-10575-3 ISBN 978-3-031-10576-0 (eBook) https://doi.org/10.1007/978-3-031-10576-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Rob Friedman/iStockphoto.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To Nomfundo’s beloved parents Velaphi Elkan Ngwenya and Desideria Harriet Ngwenya, who succumbed to COVID-19 while this book project was in progress.

Acknowledgments

This book project arose from a partnership between Telkom and the Wits School of Governance (WSG). We wanted to bring together scholars and practitioners to explore practical solutions that could revitalize the South African economy. The book is, therefore, a testament to what can be achieved when both the public and public sectors pool resources and collectively aim to be part of the solution. We would like to thank Telkom, especially former Chief Executive Officer Sipho Maseko and his team, Siyabonga Mahlangu, Phindile Dyani and Vukani Mde for their generous and unencumbered financial support to bring this project to fruition. We also thank them for their consistent commitment to providing a platform that can explore solutions to the country’s challenges beyond a single ideological framework. Mzukisi Qobo initiated this project, defined its intellectual contours, and secured the invaluable partnership with Telkom. We thank him for his tireless leadership from the inception of the project to the conclusion of the book. Nomfundo Ngwenya pulled this project together as its project lead. She shaped its thematic coherence and brought a diverse team of scholars, researchers, and practitioners to lend their insights. We would like to thank her for the meticulous manner in which she held this initiative together till its completion. The success of a multi-authored book rests significantly on the commitment of every single author. This point is especially pertinent to this book as it was written during one of the most trying periods in recent human history. Writing began in earnest in the middle of the first wave of COVID-19, when all involved were gripped by fear of the vii

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ACKNOWLEDGMENTS

unknown. Despite the personal and professional trials that the pandemic presented, authors stoically focused on delivering excellent outputs and they displayed patience when circumstances dictated. We express our sincere gratitude to all authors who stayed the course, despite the many personal and professional challenges that the pandemic presented. We especially pay tribute to Prof. Benno Ndulu, who passed away shortly after submitting the first draft of his chapter. May his family take pride in his work and may his soul rest in peace. Given the urgency and weight of the book’s subject matter, we had to ensure that each chapter was subjected to rigorous scrutiny. Quality control was, therefore, built into the project design at the outset, and written peer review from respected academics was central to quality control. We are grateful to our reviewers for their constructive reviews and suggestions on how to align each chapter to the book’s objectives. Another important form of peer review we employed was validation workshops. Chapters were initially published individually as working papers and circulated to subject-area specialists, from whom we solicited feedback through online discussions. We express our gratitude to Kemantha Govender and Lerato Mtambanengwe at Wits School of Governance, who organized effective validation workshops. We also appreciate the excellent work done by Marisa Honey who edited the papers and Thabiso Sebata from Start Media for the graphic work to make the papers presentable and interesting. We thank Faizel Ismail, Anthoni van Nieuwkerk, and Vusi Gumede who provided guidance at various points in the development of this manuscript, especially their suggestions on the structure and alignment of the various themes. The work of the operational support team was central to ensuring the project’s administration was managed efficiently. We thank Humbulani Ndou at the Wits School of Governance (WSG) and Thapedi Maketa at Wits Enterprise for managing the relationship with the various authors who participated in this project. Finally, we are most grateful to Odilile Oyidele and Phumudzo Mufamadi, who skillfully and efficiently presented this volume to Palgrave Macmillan for publishing. We also sincerely appreciate the guidance received from Anca Pusca at Palgrave and for being receptive to the initial concept note. Tim Shaw has been a great encouragement. He never tires in championing scholarly endeavors from the Global South. We benefited immensely from the rigorous reviews of Palgrave’s anonymous reviewers. We thank them for their critical comments and useful suggestions.

Contents

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2

3

Introduction: Responding to Pandemics and Economic Challenges: Policy Choices Post Covid-19 Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya Reconstruction in the Aftermath of Global Health and Economic Crises: Historical Lessons for South Africa Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya Introduction Economic Crises Lessons for South Africa Conclusion References Building State Capacities and Dynamic Capabilities to Drive Social and Economic Development: The Case of South Africa Mariana Mazzucato, Mzukisi Qobo, and Rainer Kattel Introduction Conclusions and Recommendations References

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11 11 19 31 37 38

43 43 69 71

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5

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CONTENTS

COVID-19 and Beyond: Rethinking Industrial and Competition Policy Nishal Robb and Thando Vilakazi Introduction Industrial Policy—Principles, Experiences, and Outstanding Issues Learning from the History of Late Industrialization Outstanding Issues and Challenges for Industrial Policy The South African Approach to Competition and the Need to Rethink It An Industrial Policy/Competition Policy Nexus in South Africa? Discussion Conclusion References Monetary and Fiscal Policy Challenges Posed by South Africa’s Deepening Economic Crisis and the COVID-19 Pandemic Nombulelo Gumata Introduction Conclusion References The Short-Term Labor Market Effects of South Africa’s National COVID-19 Lockdown Timothy Kohler, Haroon Bhorat, Robert Hill, and Benjamin Stanwix Introduction Results Variation in Labor Market Outcomes Within and Between Groups Multivariate Analysis: Estimating the Probabilities of Transitions in Labor Market States Conclusion References

75 75 79 86 88 90 91 95 97 98

103 103 124 124 129

129 133 135 141 146 147

CONTENTS

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Social Security and Social Protection in South Africa Alex van den Heever Introduction Conclusion References Repositioning State-Owned Enterprises (SOEs) and Development Finance Institutions (DFIs) Garth le Pere Introduction Assessing the State of SOEs and DFIS The Comparative Experience: What Can SA Learn? Governance of SOEs, DFIs, and the Private Sector: Toward a PPP Framework Policy Recommendations Conclusion References Energy Transition for Post-COVID-19 South Africa Iraj Abedian and Nthabiseng Tsoanamatsie Introduction The Importance of Electricity to the South African Economy Consequences of Unreliable Electricity Supply Environmental Requirements and Technological Changes Taking Place in the Electricity Sector The Growing Tide of Renewable Energy Technologies Key Macroeconomic Considerations as the Country Makes Its Energy Transitions Socioeconomic Benefits to be Derived from the Energy Transition The Fiscus Municipalities and Energy Transition Regional Energy Dynamics and Opportunities Conclusion and Policy Recommendations References

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151 151 172 173 177 177 180 195 200 204 206 207 211 211 214 216 217 219 221 223 225 226 228 229 231

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CONTENTS

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Future of Energy in South Africa and Prospects for Building Regional Value Chains Hany Besada Introduction An Examination of South Africa’s Energy Sector Drivers and Opportunities for Renewable Energy Deployment in South Africa Challenges Facing Renewable Energy Deployment in South Africa Strategies and Policies for Renewable Energy Deployment in South Africa Policy Proposals for Renewable Energy in South Africa Policy Scenarios Comparing Policy Options Creation of Regional Energy Value Chains as a Strategy for Renewable Energy Development Steps and Measures to Be Considered by South Africa for Green Coal Policies The Role of Gas in Renewable Energy Transition Experiences in Transiting to Renewable Energy Conclusion References

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The Digital Divide in South Africa: Insights from the COVID-19 Experience and Beyond Benno Ndulu, Nomfundo Xenia Ngwenya, and Matlala Setlhalogile Introduction COVID-19 and Lessons on the Need for Digitalization in South Africa Business and Digitalization The Education Sector and Digitalization Digitalization in South Africa—Recent Progress Internet Penetration in South Africa—Access and Use Spatial Inequalities and Internet Penetration Rate Growth in Smartphone and LTE Devices Access vs Usage Internet Users’ Profile in South Africa

235 235 236 238 242 245 249 250 253 256 260 261 262 264 265 273

273 275 275 276 277 278 279 280 280 281

CONTENTS

Key Drivers of Inclusive Uptake of Digital Services in South Africa Affordability Digital Literacy Fit for Purpose Content Actions for Inclusive Digitalization Pricing and Tax Policies for Inclusive Digital Transformation Digital Taxation Innovative Interventions Spectrum That Can Enable New Business Models Conclusion References 12

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From “Crisis Compacting” to Resilient Social Contracts: Emerging Lessons from COVID-19 Erin McCandless Introduction: COVID-19, Building Back Better, and Resilient Social Contracts Conclusion: Implications for South Africa References Conclusion: Building a Resilient State and Inclusive Society Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya

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281 282 283 283 285 285 286 287 289 290 290 297

297 313 315 325

Bibliography

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Index

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Notes on Contributors

Abedian Iraj is Founder and Chief Executive of Pan-African Investment and Research Services (Pty) Ltd. and Chairman of Pan-African Capital Holdings (Pty) Ltd. Besada Hany is Research Fellow with the United Nations UniversityInstitute for Natural Resources in Africa and Executive Director of the Institute for Natural Resources and Sustainable Development. He holds a Ph.D. in Politics and International Studies from the University of Warwick. Bhorat Haroon is Professor of Economics and Director, Development Policy Research Unit, School of Economics, University of Cape Town, South Africa. Gumata Nombulelo is Economist and has authored several books in the areas of money and banking regulation, international finance and macroeconomics, macro-prudential tools and financial stability, labor markets, monetary, and fiscal policy. Hill Robert is Junior Researcher and Ph.D. candidate, Development Policy Research Unit, School of Economics, University of Cape Town, South Africa. Kattel Rainer is Deputy Director and Professor of Innovation and Public Governance at the UCL Institute for Innovation and Public Purpose (IIPP). He leads the Estonian Government’s Gender Equality Council xv

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and is a member of E-Estonia Council advising the Prime Minister of Estonia. Kohler Timothy is Junior Researcher and Ph.D. candidate, Development Policy Research Unit, School of Economics, University of Cape Town, South Africa. le Pere Garth is Extraordinary Professor in the Political Studies Department at the University of Pretoria and a Senior Associate at the Mapungubwe Institute for Strategic Reflection in Johannesburg. His areas of interest and publications record include international political economy, political philosophy, public policy, multilateral trade, and emerging markets, South African foreign policy, and the politics of China, Europe, Africa, and the Middle East. Mazzucato Mariana is Professor in the Economics of Innovation and Public Value at University College London where she is the founding director of the UCL Institute for Innovation and Public Purpose. McCandless Erin is Associate Professor at the Wits School of Governance, University of the Witwatersrand, South Africa. Ndulu Benno was a Visiting Professor at the Wits School of Governance, University of the Witwatersrand, South Africa; and Visiting Professor at the Blavatnik School of Government at the University of Oxford. He served on President Cyril Ramaphosa’s Economic Advisory Council. He was former Governor of the Central Bank of Tanzania. He passed away while this manuscript was being finalized. May he rest in peace. Qobo Mzukisi is Head of School at the Wits School of Governance, University of the Witwatersrand, South Africa. He also serves on President Cyril Ramaphosa’s Economic Advisory Council. His areas of expertise are in Public Policy, International Political Economy, and Geopolitics. He holds a Ph.D. in Politics and International Studies from the University of Warwick. Robb Nishal is Associate Research at the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg, South Africa. Setlhalogile Matlala is Lecturer at the Wits School of Governance, University of the Witwatersrand. He is also Senior Associate at Tutwa

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Consulting Group. As a political economist he specializes in political risk analysis and public policy analysis. Soko Mills is Professor of International Business and Strategy at the Wits Business School, University of the Witwatersrand, South Africa. He holds a Ph.D. in International Political Economy from the University of Warwick. Stanwix Benjamin is Senior Research Officer, Development Policy Research Unit, School of Economics, University of Cape Town, South Africa. Tsoanamatsie Nthabiseng has worked in the field of economic research for more than 10 years and has been Senior Economist at PanAfrican Investment and Research Services for the past 6 years. Prior to this she worked for both the University of Pretoria and the Human Sciences Research Council (HSRC). She received her Master’s degree in economics from the University of Pretoria. Head of Research at Pan-African Investment and Research Services (Pty) Ltd. van den Heever Alex is Chair: Social Security, Wits School of Governance, University of the Witwatersrand, South Africa. Vilakazi Thando is Executive Director of the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg, South Africa. Xenia Ngwenya Nomfundo is Visiting Research Fellow at the Wits School of Governance, University of the Witwatersrand, South Africa. She is also Managing Director at NXN Analytics. She was previously Chief Director for African Economic Integration and head of BRICS at the National Treasury of South Africa. She holds a Ph.D. in International Studies from the University of Cambridge and M.Sc. in Politics of the World Economy from the London School of Economics. She is Executive Director at the African Development Bank and Visiting Research Felliow at the Wits School of Governance.

List of Figures

Fig. 5.1

Fig. 5.2

Fig. 6.1

Trends in selected economic indicators (Source South African Reserve Bank and author’s calculations) (Note The grey shaded area denotes the recession in 2009. The budget balance as percent of nominal GDP in (a) was smoothed using the 4-quarter moving average.) Selected fiscal policy indicators and the interest rate-GDP growth differentials (Source South African Reserve Bank and authors’ calculations) (Note The grey shaded area denotes the recession in 2009) Trends in key labor market indicators, 2008Q1–2020Q2 (Source QLFS 2008Q1 to 2020Q2 [StatsSA]. Authors’ own calculations) (Notes [1] All estimates weighted using relevant sampling weights. [2] Official (narrow) definition of unemployment used throughout)

105

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List of Tables

Table 4.1 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 7.1 Table 10.1 Table 12.1

Industrial policy instruments Sample sizes and weighted population estimates, by quarter Transition matrix of conventional labor market statuses, 2020Q1–2020Q2 Year-on-year changes in employment by select demographic and labor market groups Year-on-year changes in employment by main industry and occupation Mean weekly working hours by demographic group, 2020Q1–2020Q2 Overview of social security expenditure in South Africa for 2000 and 2018 Comparison of policy options to promote renewable electricity COVID-19 comparative data: USA, South Africa, South Korea

81 133 136 138 142 144 164 254 304

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CHAPTER 1

Introduction: Responding to Pandemics and Economic Challenges: Policy Choices Post Covid-19 Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya

This research project was initiated at the beginning of the COVID-19 pandemic, a time marked by significant economic and social dislocations around the world. The world was caught unexpected by what may yet become the deadliest pandemic of the twenty-first century. It was in April 2020, barely two months after COVID-19 was declared a pandemic, that

M. Qobo (B) Parktown, South Africa e-mail: [email protected] M. Soko Wits Business School, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] N. X. Ngwenya Wits School of Governance, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_1

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a group of scholars from various disciplines came together to give shape to the project, which at the time was titled “The Future Economy Project.” It was clear to us as editors and conveners of “The Future Economy Project” project that the world would not be the same again, and that new ways of thinking about economic policy were required. This is also a time when digital transformation intensified as many places of work turned to digital tools to conduct their business, and as society’s digital awareness grew. At the time we conceived this project, the full effects of the pandemic were not yet evident. Yet it was already apparent that the health crisis that the world was experiencing was the first of its kind since the 1918 Spanish flu, and that it would have far-reaching implications for the global economy, hitting the most vulnerable countries and segments of society the hardest. It was therefore important that the project considered public policy responses to the social and economic dislocations spawned by the COVID-19 pandemic, and identify opportunities for implementation of reforms that will shape the future economic policy and growth trajectory. We thought it was important that we study the pandemic closely, and do so through a socio-economic lens that draws on history, approaches to state-market relations, and public policy perspectives. What we have learnt from history is that many societies that have gone through tough economic times, either as a consequence of wars or economic depressions, have managed to adopt policy measures that were not popular at the time, that entailed difficult trade-offs, and that yielded innovation. We sought to examine the role that social, fiscal, and industrial policies could play in driving economic recovery in the wake of the social and economic damage caused by the pandemic. We also sought to examine how policymakers could bolster state capabilities in order to respond to and attenuate the social and economic effects of COVID-19. We also took a closer look at the labor market conditions and the lessons that could be drawn from the COVID-19 pandemic about the future of employment. Additionally, we explored three key areas that will play a crucial role in shaping future economic revival, namely digital futures, the role of state-owned enterprises, and energy transitions. At the time of completing this edited volume, two years after the onset of COVID-19 pandemic, the world was still reeling from its aftereffects, having gone through several variants, with many businesses closed permanently and households losing livelihoods. There have been significant irreversible losses: loss of life, loss of social relationships, and loss

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of economic activity. When we first mooted this project, we wrongly assumed that developed countries would demonstrate solidarity in helping developing countries to access vaccines and to provide much-needed succor in the face of a devastating crisis. Many of the affected countries are on the African continent and have weak fiscal capacity. Some are faced with sovereign debt crises and lack the resilience to bounce back quicker from the COVID-19 pandemic. The majority of African countries found themselves vulnerable and in need of both vaccines and developmental assistance. Vaccine nationalism took the center-stage, revealing deep inequalities between the developed North and the developing South. Although some countries borrowed from the emergency window of the International Monetary Fund to ameliorate the risks posed by COVID-19, the lack of certainty over how long the pandemic would last made it harder for these countries to maximize benefits and plan for the future. In South Africa, the first set of hard lockdown measures were promulgated in mid-March 2020 and lasted for four months. The hard lockdown (risk-adjusted Level 5) had a pronounced effect on the economy and society. It became clear thereafter that the economy was not resilient, as many small and medium-sized enterprises collapsed and companies shed jobs. The country’s macro-economic foundations were shaken too as the debt-to-GDP ratio widened and debt service costs mounted. The unemployment rate rose along with declining economic output. To stave off the social pressures, in April 2020, the South African government announced a temporary unemployment income grant of R350 for all unemployed people and an additional R500 child income grant per caregiver for six months. The R350 grant continued as social relief for distress after the initial cycle of its implementation. As things stand, this social policy instrument is likely to be a permanent feature of government’s policy tools as contestations over the need for a permanent basic income grant intensifies. The central bank, the South African Reserve Bank, also took extraordinary measures at the height of the pandemic. In addition to its sharp downward adjustment of the repo rate, which provided much-needed relief to businesses and middle classes, the central bank embarked on government bond purchases to ease strains in the bond market. This was the first time in many decades that the country witnessed the calibration of fiscal and monetary policy in the face of a severe crisis.

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The second wave of the pandemic, which started in December 2020, revealed deep cracks in the national public health system, the failure of government to plan ahead and prepare for the inevitable, and poor coordination across government departments and agencies. Meanwhile, several wealthy countries had pumped money into early-stage vaccine development, betting on drugs as long-term solutions, and injecting large stimulus packages into their economies. Many of the drug manufacturers that were undertaking clinical trials were domiciled or originating in advanced industrial economies, and their governments contributed to early-stage R&D development. On the other hand, most developing countries had neither fiscal nor technical capacity to do the same. Developing countries were at the back of the queue, waiting their turn after advanced industrial economies had vaccinated their citizens be. Those countries that could vaccinate their citizens early on were better equipped to revive their economies. Further, they also had more fiscal capacity to do more to cushion their citizens and spur economic dynamism. This uneven global response created opportunities for multiplication of variants and their spread, especially in those countries that had limited health infrastructure. Toward the end of 2021, countries, such as the United States, the United Kingdom, China, and those in Europe, formulated strategies to build long-term resilience in their economies, combining relief measures for the most vulnerable in society with long-term recovery strategies to ignite economic dynamism. In response to the COVID-19 pandemic, the European Union (EU) set itself an ambitious mission to build “The Next Generation EU” to achieve a greener, more digital, and more resilient Europe propelled by the 880bn Euro Economic Recovery Plan. This financing package was to be replenished through borrowing from international capital markets. The disbursement mechanism comprised of grants and concessional loans to various EU member states upon approval of economic recovery plans. Many African countries lacked the fiscal wherewithal to undertake such bold measures. South Africa’s policy tools were not robust enough and government was also hollowed out by years of corruption and mismanagement. The country’s economic recovery plan was undermined by revelations of widespread corruption in the procurement of Personal Protective Equipment (PPEs) during 2020, and significant financial wastage across the different spheres of government. It became clear that

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the country suffered from both tolerance for corruption and deficiencies in state capacity. There is an urgent need for South Africa to devote significant resources toward building state capability and investing in new infrastructure and renewing existing infrastructure. COVID-19 has brought this matter to the fore for at least three reasons. Firstly, it has laid bare the need to urgently address the country’s social infrastructure deficiencies in the medium to long-term. Secondly, it has amplified the necessity to invest in economic infrastructure for sustainable and inclusive growth. Thirdly, it has highlighted the importance of infrastructure investment as a mechanism for stimulating employment and economic growth in the COVID-19 response Reconstruction phase. Most crucially, there is a need for leadership with the political will and conviction to tackle policy and legislative bottlenecks that stand in the way of economic change. Replenishing capabilities at both the executive and technocratic layers of government is essential for success. In addition, there must be strong institutions that are geared toward accelerating the implementation of government plans and programs instead of inventing new ones. The various government policy blueprints—ranging from the National Development Plan to the Economic Recovery and Reconstruction Plan that President Cyril Ramaphosa announced at the end of 2020—are crying out loudly for implementation. For the African continent broadly, it will take nothing less than collaboration to build resilience and respond more robustly to future pandemics. Every time the African continent is faced with a major health crisis we are reminded of its institutional weaknesses and lack of preparedness to respond with agility in curbing the spread of infections. Crises are also a rude awakening to the importance of developing capabilities for early warning systems and acting before the health risks become overwhelming. The African continent struggled to pull together the capacity for testing and contact tracing, and its health-care systems were overwhelmed every time infections rose or new variants manifested. Africa needs to build a robust infrastructure for long-term resilience. Building pharmaceutical manufacturing capabilities will require that policymakers pay close attention to a sound governance framework, fiscal resilience, technical capacity, strengthening regional integration and cooperation, and developing human capital. It is important that African countries work together and share expertise. Although they need to work closely with partners in the North and from other developing countries

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and emerging economies, African countries must coordinate their activities and take a long-term strategic view on building vaccine manufacturing capacity through scientific cooperation, technology transfer, developing human capital, and nurturing value chains. Although the severe socio-economic effects of a selfish global response to the pandemic were felt throughout the developing world, this book focuses primarily on South Africa. The book is divided into 13 chapters. Chapter 2 situates the COVID-19 pandemic against the backdrop of the history of pandemics and economic crises. This includes the Spanish flu in 1918, which coincided with World War I and the various economic crises up to the global financial crisis of 2008. It studies the role of the state in responding to these various crises using social and economic policy tools. It also assesses ways in which the state governs the markets during times of crises, and its role in promoting innovation in the economy. Chapter 3 discusses how crises can act as a spur for long-term social and economic change. In particular, it discusses the idea of building state capacity and capability for resilience, and how public institutions can be shored up with necessary resources and capacities to respond to crises situations. Further, the chapter reviews various government’s strategies and underlines their shortcomings. The key contribution of this chapter is to lay out insights on the institutional quality required across the different spheres of the state, as well as the necessary intervention to improve innovation in public institutions. Chapter 4 looks at how we might rethink industrial policies in the wake of the COVID-19 pandemic, especially to focus on supporting new economic entrants and promoting strategic rivalry in concentrated sectors of the economy and promoting innovation and resilience in the economy broadly. An important argument advanced in this chapter is that competition and industrial policies should not be seen—or deployed— apart from each other, but in a coordinated and mutually reinforcing fashion. The COVID-19 pandemic and attendant economic crisis, the authors observe, should provide an opportunity for new forms of regulation to curtail abuse of dominance by large firms, with competition policy playing a proactive role in shaping the economy. Business unusual, postCOVID-19, should entail stimulating innovation and transformation at sector level. Chapter 5 provides an important background to historical factors that have shaped the South African economy up to the onset of the COVID19 pandemic. Apart from its overview of the country’s developmental

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strategies over a long period of time, it also pays close attention to the structure of public spending and the dynamics of debt accumulation. The chapter provides policy options that can offer a way out of the country’s growth constraints through strengthening the institutions of macro-policy coordination. Chapter 6 demonstrates that fiscal policy post-2009 has clearly not yielded the desired effects. The macro-economic stability as captured by output growth and employment growth has been elusive, according to the author, and with widening budget deficit, and increases in government debt growth and the debt-to-GDP ratio. The chapter makes a case for tighter co-ordination between monetary and fiscal policy, and argues that for this to be successful, a low and stable inflation environment is necessary. It further contends that there are various other central bank balance sheet tools over and above bond purchases that can be used to contribute to fiscal sustainability, price, financial, and macro-economic stability. Chapter 7 makes a strong case for the overhaul of social security and protection architecture in South Africa in the wake of COVID-19. It contends that COVID-19 pandemic has revealed the inadequacy of social security and protection measures in society and provides the rationale for the provision of a robust social infrastructure in the face of market forces that create winners and losers. This chapter also probes the reasons for inadequate social protection since 1994, a reality the author credits for the vulnerabilities suffered by the underprivileged sections of the population during the pandemic. The chapter concludes with recommendations for a comprehensive social security system in South Africa. Chapter 8 discusses the potentially transformative role of state-owned enterprises and development finance institutions in the economy. Before examining the role of these entities in generating economic dynamism, the chapter casts a critical spotlight on their performance and makes a strong case for reform, starting with their consolidation under a single legal and policy instrument. It also argues for greater coordination between the state-owned enterprises and development finance institutions to build synergies and augment their capabilities for greater impact. The chapter also offers some comparative perspective which could serve stateowned enterprises better under the COVID-induced crisis conditions in the economy. The centrality of the energy crisis to South Africa’s economic woes, compounded by the state of crisis of the state-owned electricity utility,

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has warranted two chapters on addressing the country’s energy transition. Chapter 9 focuses on the stranglehold on growth that the resourceintensity of the South African economy creates. It contends that in large part the state-owned energy utility, Eskom, bears significant responsibility for economic underperformance. The chapter makes a case for South Africa to accelerate its transition to renewable energy and reap the benefits that will come through new economic activities and creation of new job opportunities in a sector that is environmentally clean. The authors build a compelling case for a sustainable development pathway through decentralized electricity generation and distribution to households and businesses. Restructuring the utility is, according to the authors, a critical step toward creating a sustainable growth path through greater utilization of renewable energy. Chapter 10 complements the previous chapter on challenges of energy transition in South Africa and explores Africa’s possibilities in utilizing its energy resources through better management of energy transition to renewable energy. The central message of this chapter is that Africa’s developmental future lies in fixing capacity weaknesses in the energy sector, enabling citizens to access energy sustainably, and in building regional energy value chains. The chapter explores possibilities for regional value chains that could facilitate structural and just energy transition. The chapter enriches the debate on energy transition by drawing upon international experiences and reflecting on policy actions that African countries need to take to manage their energy transition while responding to socio-economic challenges. Chapter 11 discusses COVID-19 through the lens of digital changes in society. It notes that even though the pandemic presents developing countries with an opportunity to accelerate digital inclusion, very few have been able to take advantage. The central argument of the paper is that digital access should be seen as an entry-level condition for digital inclusion—and not the end goal. Usage, or uptake, along with the complementary impact should be the ultimate goal. The bulk of the chapter is on the strategies required to narrow the digital divide across income levels, urban–rural stratification, and age. Importantly, it analyzes the force that drive digital divide and proffers recommendations on the policy tools required for narrowing the digital divide. Chapter 12 looks at how COVID-19 has shaken social contracts and makes a compelling case for why it is important to strengthen social

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contracts in times of crises. The deep inequalities that COVID-19 shone a spotlight on, especially during the periods of hard lockdown measures, make well-designed social contracts necessary and urgent. The glue that holds governments and the public together is trust. Weak social contracts are a sign of erosion of public trust. This chapter articulates a paradigm of social contract during crisis periods that utilizes disasters as triggers to build greater resilience. The chapter offers a clear policy lens that decision-makers can use to respond better to crises, especially to navigate complexity and strengthen social contracts for resilience. Drawing on examples from around the world, the chapter also lays a pathway on what countries can do better to limit the risks posed by COVID-19.

CHAPTER 2

Reconstruction in the Aftermath of Global Health and Economic Crises: Historical Lessons for South Africa Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya

Introduction Countries that have gone through tough economic times, either due to health pandemics, economic depression, or wars, have managed to learn from adversity and rethink their development models. This chapter draws lessons from different countries’ experiences responding to health and

M. Qobo (B) Parktown, South Africa e-mail: [email protected] M. Soko Wits Business School, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] N. X. Ngwenya Wits School of Governance, Johannesburg, South Africa e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_2

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economic crises and offers a reflection on South Africa’s own history, particularly the state’s role in responding to adversity. Historically, the state has played a leading role in using crises to spur social and economic change, often through building new institutions, legislative or regulatory frameworks, and recasting its relationship with the markets. Crises often create pressure for collective action, expressed in the state’s activities, to ameliorate social and economic ills. At times, new political regimes are established to replace those that are considered to be ineffective or to serve narrow interests. In this chapter, we examine how, at various historical points, crises have strengthened some states and led to the creation of new institutional and economic arrangements. The central aim of this chapter is to identify and draw historical lessons that South African policymakers can deploy as a framework for shaping future economic policy and strategy. It bears mentioning, nevertheless, that context matters in undertaking this analysis, especially if decision-makers know how to translate such lessons into useful policy actions. The various crises under discussion occurred in unique and divergent economic and institutional contexts, significantly dissimilar to those of contemporary times. The measures were also not perfect, but effective. As such, not every lesson from the past is necessarily translatable to public policy action today, precisely because contexts and the means differ. The exercise we undertake here is merely for the purpose of delineating policy options that decision-makers can use. The cases that we have selected are countries in which the state demonstrated a sense of mission and agility. They are by no means perfect cases, and lessons cannot easily be implanted in South Africa unless decision-makers show a willingness to adapt those lessons that suit their social and political context. The chapter consists of three sections. The first and second sections examine health and economic crises respectively in a historical context. These crises are discussed in turn, assessing their causes and effects, and the policy responses they elicited. The health crises under discussion are the Spanish flu of 1918–1920, and the Severe Acute Respiratory Syndrome (SARS) epidemic of 2002–2004. The Spanish flu had the broadest global reach and highest fatality rate in modern history. SARS is analyzed as the most recent health crisis that bore similarities to COVID19. The analysis will demonstrate how some of the worst-affected Asian countries used SARS to rectify their policy shortcomings and draw lessons to prepare for future crises. To varying degrees, these epidemics have had

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significant socio-economic consequences and triggered major responses by the state. Importantly, the analysis explores the interplay and nexus between the outbreak of the pandemics and the ensuing economic crises. The economic crises that are the subject of analysis in this paper are the global depression of 1929 and the global financial crisis of 2008/2009. These economic crises prompted national governments to embrace and enact unorthodox fiscal and monetary policies to revive their troubled economies. Nation-states became powerful forces to drive social and economic change, as well as to shore up institutions. Section four distills the salient lessons for South Africa of how nation-states responded to the aforementioned health and economic crises. Lessons gleaned about these crises highlight how the South African government can capitalize on the COVID-19 crisis to catalyze and accelerate the enactment of long-delayed socio-economic reforms, including ramping up the public health system. The next section focuses on the Spanish flu. The Spanish flu (1918–1920) and South Africa The Spanish flu was an influenza virus that attacked the respiratory system. It was first observed in Europe, the US, and Asia, after which it spread to other regions such as Africa and Oceania due to the participation of laborers and soldiers from these regions in World War I (Tsoucalas et al. 2016). Although many historians attribute its origins to bats in China, more recent research suggests that it may have originated from pig farms in the American Midwest (Bass 2020). Its rapid spread is attributed to the drafting of young men, who left for World War I and carried the flu to Europe (Tanner 2018), and it would later spread through North America, South America, Asia, and Africa. Owing to the absence of rigorous statistics, data on the mortality rate of the flu varies significantly. The lowest range places the toll at 17.4 million (0.95% of the world population), the middle range at 24.7–39.3 million, and the high range at 50–100 million—2.7 to 5.5% of the world population (Tsoucalas et al. 2016). The Spanish flu had a negligible effect on the stock market, because four years of World War I had had a dampening effect on stock market activity. Similarly, the war had severely disrupted global supply chains, thus minimizing the effect of the pandemic on global supply chains (Taylor 2020). It is difficult to draw a direct link between the Spanish flu and the Great Depression, which followed nine years later. However, some

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historians argue that the psychological effects of the Spanish flu, and the desire to live abundantly, led to the financial speculation and excesses of the “Roaring Twenties,” which heated up the stock market, resulting in the crash in 1929 (Smith 2021). The subsequent tightening of money supply was rapid, and this sparked the events associated with the Great Depression, which is discussed in the third segment of the chapter. In South Africa, the virus appeared in 1918 after a ship landed from England with 2000 soldiers of the South African Labour Corps, which had stopped in Sierra Leone on its way back from Europe and found that the disease was already prevalent there (Phillips 2020). The pandemic had a devastating effect on the country, at a time when the new Union government was still contending with the social consequences of the Anglo-Boer War (South African War) of 1899–1902. The effects of the war led to the uprooting of Afrikaner farming communities from the countryside to the urban areas in search of work, a situation that amplified what would later be characterized as the “Poor White Problem.” As a result of the Spanish flu, between 4 and 6% of the country’s population died, making it one of the worst-affected countries in the world (Phillips 2020). The initial lack of urgency in the state’s response was reflected in the media coverage at the time, with People’s Weekly newspaper calling it “our old friend the ordinary common or garden influenza” (Phillips 1987, 211). This was later echoed in the dismissiveness with which some greeted the COVID-19 pandemic as just another flu when it first emerged. It was the rapid number of deaths in October 1918—later to be known as Black October—that grabbed the attention of the Union government. Following Black October, the fear of another pandemic wave accelerated forward planning. This led to the enactment of economic policies that favored white people, as well as the creation of a long-term institutional solution in the form of a public health system. These policies included the Industrial Conciliation Act of 1924, which reserved certain categories of work for white workers at high wages, the Colour Bar Act of 1926, which was mainly to protect both skilled and unskilled white workers from black labor competition, and the Mines and Works Act of 1926, which barred Africans from skilled jobs (Roux 1948; Wilson and Thompson 1975; Davenport 1977). The most authoritative account of how the state used the pandemic to improve the socio-economic plight of whites is by Howard Phillips (1987), who conducted an in-depth study of Bloemfontein, supported

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by citations from official documents and newspapers of the time. Bloemfontein’s significance as a case study derives from the comprehensive measures it took that were a combination of economic and medical responses. Its response was more forward-looking, with an emphasis on preventative rather than curative measures (Phillips 1987, 210). The fear of a possible second wave of the pandemic presented a unique and ideal opportunity to urgently implement policy reforms. It took the agility of Bloemfontein’s Town Clerk and Treasurer, JP Logan, to capitalize on the momentum to achieve these changes. As Phillips (1987, 224) puts it, “Logan had realised that Black October had created a uniquely favourable climate for his long-cherished ideas on social reform to be put forward and accepted.” The events of Black October coincided with economic hardship. Rising inflation and a falling gold price fueled labor unrest on the mines, leading to the Rand Revolt in 1922, which began as an industrial action by white mineworkers pressing for job reservation for white workers. In addition, the nationalist ferment, which drew its force from the plight suffered by Afrikaners during the Anglo-Boer War, pushed the pendulum toward greater state intervention to ameliorate the social and economic conditions of the politically significant Afrikaner constituency at the time. In essence, the “Poor White Problem” acted as a spur for more determined state interventions. It prompted a parliamentary enquiry and captured the attention of political decision-makers. The farming communities bore the brunt of the economic strain. Many had flocked to the cities in search of work, spawning various other social problems such as a lack of housing (Wilson and Thompson 1975). Although the main focus of policy interventions was the Afrikaner rural communities in the countryside, Africans were also plagued by poverty, which intensified after the introduction of a poll tax Campbell (1943, 43) points out that “[p]oor whites were also engaged by the State on the State-owned railways and harbours, and in the other branches of the civil service – again at the expense of the natives, who had been employed in large numbers.” As more affluent citizens became exposed to the squalor in which poor whites lived, Logan seized this public sympathy to lead the administering of a Public Health and Social Welfare Survey of Bloemfontein. The survey was focused exclusively on the white population and attributed the scale of the pandemic’s devastation not only to slums, but also to “the persistent poverty of body and mind” of poor whites (Phillips 1987, 225).

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To address this widespread poverty, the survey proposed several reforms in health, housing, and employment. These included a twopronged solution to the housing problem, which had been identified as most pressing in the survey. First, a scheme was established for the municipality to buy slum properties and upgrade them. This allowed the municipality to ensure that they were maintained according to the required minimum standards, while positioning the municipality to control the town’s cheapest accommodation and guarantee that living conditions did not deteriorate to pre-crisis levels. When the slum-buying scheme did not totally eradicate the problem of whites living in backyards, a second scheme was designed for the government to build houses on municipal-owned land and acquire more properties for distribution to poor whites. By 1920, policy measures included a reallocation of cottages meant for the colored population to poor whites; a hire-purchase scheme for workmen; successful negotiations with the Department of Defence to hand over houses it was not using at Tempe military base; and encouraging the Railways Administration to provide houses for its employees. The Union government presented a new source of financial assistance through the 1920 Housing Act, but this was temporarily halted in 1921. To plug the funding gap, the municipality of Bloemfontein turned its attention to the private sector and took a loan with the South African Mutual Life Assurance Society, which would allow it to support city residents who intended to build homes. Apart from housing, the authorities set out to tackle the idleness of poor whites and to improve the wages of those in employment. Policy steps included the provision of additional income for poor white women and relief labor for disabled residents. Another measure was the establishment of a Social Welfare Department, which was responsible for child welfare. The third set of policies had to do with the improvement of sanitary matters. Having identified the need for good sanitation, the municipality invested in the sewerage system and, by 1924, all white households were connected to the waterborne sewerage system. The municipality had taken over the provision of sanitation from private companies (Phillips 1987, 230). The consequences of these reforms became apparent, as Bloemfontein’s development stood out among other South African towns in the interwar years (Phillips 1987, 226). This was reflected in the comments of a visiting British local government expert, who remarked

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in 1925 that Bloemfontein went “far beyond the conventional limits of municipal concern for the public health” (Phillips 1987, 226). Beyond Bloemfontein, state action continued to focus on improving the socio-economic conditions of the Afrikaner community. The bulk of the resources for economic development were initially drawn from external sources. Britain offered grants and loans to enable the Union government to repair its social and economic infrastructure. This was a form of reparation for the loss of life at the end of the South African War. It was also a gesture that acknowledged Britain’s disruption of the social and economic life of the Afrikaner communities during the war. Britain contributed a total of seven million British Sterling in grants for English and Boer farmers in South Africa, followed by a development loan of 35 million British Sterling directed toward reconstruction and development in the Transvaal and the Orange River Colony, later known as the Free State. There was no commensurate allocation for people in rural areas, especially for black people. As Walker (1963, 819) has documented, the development loan was set aside for compensation and reparation (6.5 million British Sterling); state acquisition of the railways (13.5 million British Sterling); the takeover of existing debt by the British government (three million British Sterling); to support land settlement (2.5 million British Sterling); and to accelerate railways and public works construction (five million British Sterling). On the health front, the Spanish flu highlighted the inadequacies of state provision of health facilities in South Africa, while it also demonstrated how a crisis could catalyze the development of a public health system. In 1910, the Union did not have a properly legislated public health system. At the time of the outbreak, in 1918, a sub-department of the Department of the Interior—known as Sub-Department of Health— had been created. It was severely understaffed, with only three medical officers and a few clerks and administrative officials. Furthermore, a national conference held a few months before the outbreak had to be abandoned, as political interests between local, provincial, and national authorities could not be reconciled. The urgency brought on by the outbreak, however, led to the passing of the Public Health Act in 1919. The current structure of provincial control over hospitals and control of clinics by municipal governments is a relic of this arrangement (Phillips 1987). The Spanish flu and its handling in South Africa demonstrates how a pandemic has the potential to unlock the state’s innovation to crowd in

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financial resources for development; inject a sense of urgency to longdelayed decisions; and forge consensus among divergent views, except in this case this was a consensus among the white groups. Crucially, the state used the crisis to empower its chosen vulnerable group and laid a solid basis for its future prosperity. Legislation and political action was directed at a singular effort of eliminating the poor white problem. Severe Acute Respiratory Syndrome—SARS (2002–2004) SARS is a viral respiratory syndrome. It originated in Southern China and spread to 29 countries, with the worst-affected region being Asia. The virus led to 774 deaths (9% mortality rate) and cost the global economy $40 billion globally (Gross 2020). The most severely affected sectors were travel, tourism, and retail. Unlike COVID-19, the lockdown periods were significantly shorter and limited to a few countries during the course of the SARS virus outbreak, thus allowing the affected sectors to bounce back rapidly. Although there are limited economic lessons to draw from SARS, there are important observations to make on how governments responded and subsequently prepared themselves for future pandemics. The resources that were deployed and institutions built during this crisis were put into good use during the COVID-19 pandemic. Some of the Asian countries that have successfully contained COVID-19 are those that were affected by SARS (Graham-Harrison 2020). Thus, a key lesson from this is that public health interventions that are made today must be made with the future in mind. In Asia, countries like Taiwan and Singapore suffered the worst SARS spillovers from China (including Hong Kong). The lesson from these two countries on public health and governance responses are relevant to South Africa, especially the need to build for greater public health system resilience. In the aftermath of the SARS pandemic, Singapore identified three weaknesses and devised measures to rectify them. These were epidemiological surveillance, using non-crisis periods to test operational readiness, and establishing facilities to strengthen the country’s ability to manage an infectious disease outbreak (Singapore Government 2020). Firstly, Singapore’s pre-SARS public health system was disproportionately skewed toward treating the growing scourge of lifestyle diseases. While chronic lifestyle ailments like diabetes and hypertension have proven to be dangerous comorbidities in COVID-19, Singapore learnt that its public health system needed to improve epidemiological capabilities in

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the diagnosis and treatment of respiratory diseases. Accordingly, since the onset of SARS, the country had diversified the profile of epidemiological expertise in its health system. Secondly, Singapore was ill-prepared to implement the non-pharmaceutical interventions required to stem the rapid spread of viruses. Changes were made to stress-test the readiness of the health system outside of crisis periods. Since the outbreak of SARS, agencies have held regular emergency preparedness exercises to keep themselves operationally ready. These exercises test the country’s capacity for risk stratification, contact mapping, contact tracing, and quarantine (Ng 2020). Thirdly, the physical and technology infrastructure for handling rapidly spreading viruses was inadequate. Since the eruption of the SARS epidemic, Singapore has constructed the National Centre for Infectious Diseases (NCID), a 330-bed facility that was opened in 2019 (Lai 2019). A key feature of the center is its high-level isolation unit (HLIU) for treating high-risk pathogens, including hemorrhagic fevers caused by the Ebola and Marburg viruses, as well as biothreat agents such as smallpox and anthrax. Patients with or suspected to have these diseases are admitted through a special pathway, including a lift that isolates them from the general public. The hospital has also been designed to be spacious such that its capacity can be ramped up through the addition of beds in times of a spreading crisis. What was also identified as a weakness was that the country’s public hospitals did not have isolation facilities. Singapore has upgraded all public hospitals to ensure that they have isolation rooms.

Economic Crises The Great Depression of 1929 The Great Depression was a global economic downturn that started in 1929 and lasted until around 1939. It was considered to be the worst economic slump in the history of the industrialized world. The Great Depression started after the stock market crash of 1929, which drove Wall Street into a panic and decimated millions of investors. The economic crisis stemmed from several causes. These included declines in consumer demand, financial panics, as well as imprudent government policies that led to a collapse in economic output in the US (Morris 2017). Moreover, the gold standard—which linked virtually all the countries of the world in a network of fixed currency exchange rates—played a pivotal

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role in transmitting the US downturn to other nations. The advent of the Smoot-Hawley Tariff Act of 1930 also complicated the difficulties of the economic crisis at the time. The law increased import duties with a view to protecting American businesses and farmers. However, it backfired as European countries retaliated by imposing duties on American goods, rendering them too expensive to purchase in Europe and thereby curtailing trade (Phalan et al. 2012). Effects Various governments around the world undertook measures to respond to the economic strain generated by the depression years. Apart from European countries, there was a chain reaction of retaliatory measures by other countries, including Italy, France, Canada, Cuba, Mexico, Australia, and New Zealand. This made everyone worse off and, under such circumstances, international cooperation became strained in ways that are not dissimilar to the mood during the Trump administration. Although it began in the US, the Great Depression led to precipitous declines in industrial output, prices and investment, a sharp rise in unemployment, as well as acute deflation across the world. At the height of the crisis, industrial production in the US fell 47% and real gross domestic product (GDP) plummeted 30%. The wholesale price index fell 33%, while the unemployment rate topped 20%. By 1933, nearly 15 million Americans had lost their jobs and half the country’s banks had collapsed (Romer 1988). Between 1929 and 1933, nearly every industrialized country experienced declines in wholesale prices of 30% or more. During this period, the prices of primary commodities traded in world markets plummeted sharply. These included the prices of coffee, cotton, silk, and rubber, leading in turn to a decline in the terms of trade for primary commodity producers (Pells n.d.). The social and cultural effects of the Great Depression were no less severe, particularly in the US, where it spawned human suffering and the most adverse conditions confronted by Americans since the Civil War. As a consequence of the economic crisis, bread lines, soup kitchens, and mounting numbers of homeless people became increasingly common in American cities and towns. Unable to afford to harvest their crops, farmers were compelled to leave them decaying in the fields. Consequently, there was a mass migration of people from farms to cities in search of employment (Romer 1988). Notwithstanding undertakings

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from President Hoover and other American leaders that the crisis would be contained, it continued to intensify. In the spring of 1930, the first of four waves of banking panics started. As huge numbers of investors lost confidence in the solvency of their banks and demanded deposits in cash, banks were compelled to liquidate loans in order to supplement their insufficient cash reserves. Bank runs hit the US again in the spring of 1931 and the spring of 1932. By early 1933, thousands of banks had ceased to operate. To mitigate this calamitous situation, the Hoover administration attempted, without success, to prop up failing banks with government loans (Pells n.d.). The abandonment of the gold standard and the resultant monetary expansion were central to the recovery from the Great Depression. State Policy Responses The core preoccupation of the interventions by various governments was employment at all cost, even if it meant some of the activities were uneconomic. In the US, for example, employment creation became the leitmotif of the Roosevelt administration to which all other policy goals were subordinated. But the government lacked the fiscal means to execute its programs; the recovery was debt-financed. The focus was on public expenditure to increase output, employment, and the purchasing power of workers as a means to stimulate demand in the economy (Galbraith 1994, 108). Fiscal stimulus, employment creation, and an increase in aggregate demand were thus central to recovery efforts. To bolster the fiscal position of the state, taxes were increased, with top bracket earners subjected to 91% tax and an array of new taxes introduced for gifts and estate—mainly targeting the wealthy. The recovery of the American economy started in 1933 under the leadership of President Franklin Delano Roosevelt, with economic output growing rapidly in the mid-1930s. Real GDP, for example, grew at an average rate of 9% per year between 1933 and 1937 (Romer 1988). Although the US suffered another severe economic slump in 1937/1938, the country’s output ultimately bounced back to its long-term trend path in 1942. Recovery in the rest of the world differed greatly, with the British economy’s decline halted soon after the country quit the gold standard in September 1931. For their part, Latin American countries started to recover in late 1931 and early 1932, while Germany and Japan

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both began their recovery in 1932. France, on the other hand, resolutely entered the recovery phase in 1938. Economic revival in Canada and several smaller European countries commenced early in 1933 (Romer 1988). Other key programs and institutions to Roosevelt’s “New Deal” were the Tennessee Valley Authority, which constructed dams and hydroelectric projects to control flooding and provide electricity to the deprived Tennessee Valley region, as well as the Works Progress Administration, a job-creation scheme that provided employment for 8.5 million people from 1935 to 1943 (Romer 1988). In 1935, Congress passed the Social Security Act, which provided, for the first time in US history, American citizens with social insurance to cover unemployment, disability, and pensions for old age. Moreover, America’s entry into World War II not only spurred defense manufacturing but created jobs in the private sector. The key lesson from the Great Depression is that the state took the center stage in leading recovery, including staring down narrow interests in business. Roosevelt’s government did not consider fiscal constraints as the dead-end; instead, it embarked on deficit-spending, supplemented by high taxes, to create conditions that would generate long-term growth. Although crises back governments against the wall, they also open up possibilities to build back better. South Africa and the Great Depression The New York Stock Market crashed in October 1929 following a period of speculative boom in the giddy 1920s. The repercussions of the crash were felt across the world, including in South Africa. South Africa experienced a decline in the export of its wool and diamond commodities as a result of the depression, and this coincided with severe drought conditions (Steyn 2020). Britain suspended the gold standard in 1931 and allowed the British Sterling to depreciate. This act sparked a spate of competitive devaluations as each country sought to improve its aggregate wealth by growing exports and disciplining imports. South Africa was affected by the suspension of the gold standard, since its currency was pegged to that of the British Sterling. Uncertainty about the future of the South African pound deterred foreign direct investment. As a result of economic depression, imports fell and dividends to foreigners declined. In the same year that Britain left the gold standard, the South

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African government implemented a system of tariffs and export subsidies through the Export Subsidies Act. To protect local manufacturers, safeguard measures or “exchange dumping duties” were introduced to target countries that had depreciated their currencies as a means to induce competitiveness of their exports. Further legislative measures were promulgated to grant the government emergency financial powers to undertake extraordinary fiscal measures (De Kock 1954, 148). The depression triggered spirited economic policy debates in South Africa, and these were linked to political and ideological preferences. It was during this time that monetary policy came under very sharp scrutiny. There was pressure to use these events to chart an independent political course from Britain, and to redefine the role of the South African Reserve Bank independently from British policy choices (De Kock 1954). After a year-long delay, South Africa had no option but to follow suit and abandon the gold standard at the end of 1932, a move that helped the country to turn the tide and stem capital flight. Further, the price of gold increased by 50%, domestic investment was stimulated, the Iscor steel plant came into production, and the farming sector reaped the benefits generated by the devaluation of the South African pound (Houghton and Dugut 1973, 108). Various sectors of the economy, including food and drink, metals and engineering, and clothing and textiles enjoyed an uptick (Davenport 1977, 218). Production growth in the various sectors of the economy was spurred by the emergence of a war economy that was linked to civilian programs. The Second World War galvanized many countries, including South Africa, to accelerate manufacturing, starting with munitions, arms, and other critical supplies. In the aftermath of the war, South Africa built its industrial capabilities and expanded its agricultural productivity. The major public policy consideration for the government at the time was post-war reconstruction. The Van Eck Commission was established and set out to shape South Africa’s future growth and development path. The Social and Economic Planning Council was created and it generated policy insights to influence post-war development (Houghton and Dugut 1973, 109). Its recommendations led to an increase in farm support, the creation of marketing boards for agricultural products, and the expansion of manufacturing activities through Iscor (Campbell 1943). The war acted as an anchor to ignite economic recovery, and import tariffs played a key role in nurturing the development of an infant industry. As Steyn (2020, 61–62) points out:

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By the end of 1940, great strides had been made in putting the Union [Government] on a war footing. Local heavy industry was successfully manufacturing armoured cars, ammunition, bombs, mortars and other weapons. Uniforms, tents, beds, blankets, food and medical supplies for military use were also produced locally.

Structural transformation was evident on many fronts in the post-war years, especially between 1945 and 1970. During this period, there was a strong emphasis on taking advantage of the conditions that were created by the war to stimulate local production and build the country’s manufacturing capabilities. This bore fruit in two important areas. First, there was a rapid increase in national output, with GDP rising from R1 493 million in 1945 to R10 283 million in 1968, before the onset of the crisis years of the 1970s (Houghton and Dugut 1973, 162). During this period, the growth rate averaged 5%. Second, manufacturing overtook primary production as the main driver of growth, with many factories established in coastal towns, as these were dependent on imports of components for assembly. Over time this changed, and industrial development relocated closer to the market in the large cities. Third, there was a marked shift in demographic concentration from rural to urban areas. The growth of metropolitan areas stimulated demand for infrastructure, housing, and other amenities. Further, as Campbell (1943, 81) observed, “government embarked on large-scale public works, irrigation, road-building and the like.” The various institutions created by the state in the 1920s right through to the 1950s helped to support a manufacturing trajectory. These institutions were in the form of state-owned enterprises such as Eskom, which was formed in 1923 to produce cheap electricity for the railways and drive industrialization. Iscor was set up through the Steel Bill of 1927 as a monopoly to maximize the processing of domestic ore and achieve vertical integration in steel production. Iscor enjoyed preferential rail rates and tariff protection to deter foreign competition. This had a priceraising effect on domestic consumers. The Second World War drove steel production, making South Africa one of the world’s leading steel suppliers (Campbell 1943, 101). Hendrik van der Byl, the Director-General for War Supplies, was the founder of all the three key state entities—Eskom, Iscor, and the Industrial and Development Corporation (IDC), the industrial financing entity that was formed in 1940 to offer cheap finance to spur industrialization

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(Jacobs 1948). The IDC gave birth to the South African Coal, Oil and Gas Corporation (Sasol) in 1950 to produce synthetic fuels, mainly oil and gas from coal. These entities were pivotal in building South Africa’s industrial economy. During the period under assessment, South Africa was able to use various crises to institute economic change. The Treasury was granted the authority to throttle any capital flight (Steyn 2020, 61). South Africa under the Union government, and later under the apartheid government, used systematic industrial policy to great effect. This combined tariff protection, import-substitution industrialization, and the creation of industrial champions that were anchored in cheap energy and cheap steel to stimulate downstream production (Jacobs 1948). Industrial financing would later be offered by the Industrial Development Corporation. It was not just the manufacturing sector that benefitted, but also agriculture, which was succored through the rampedup financing of farmers by the Land Bank, especially during the drought period of 1929. Various commodity control boards guaranteed farmers an income at the beginning of World War II in 1939. Government set up the national supply boards to regulate agricultural production, trade, and distribution channels (Steyn 2020, 63). The state loomed large in propelling South Africa’s industrial development and empowering the previously poor Afrikaners, with the state sector used wholly to secure their long-term prosperity. The 2008/2009 Great Recession The 2008/2009 global economic crisis has been described as the worst economic crisis since the 1930s. The crisis was triggered in 2007 by a liquidity shortfall in the American banking system which quickly spread to Europe, leading to a financial meltdown in several of the world’s most advanced economies. The collapse of Lehman Brothers in particular, in September 2008, marked the onset of the intensification of the crisis (The Stiglitz Report 2010). This was symptomatic of the rapid buildup of debt in the US financial system—both banking and non-banking financial institutions—including commercial banks, investment banks, insurance companies, mortgage companies, finance companies, pension funds, and mutual funds (Bernanke et al. 2019). The crisis followed the same path described by Kindleberger (2000) as characterized by credit-fueled mania, followed by panics, then by crashes.

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The behavior of these financial entities saw the accumulation of $36 trillion worth of leveraged assets that had thin funding supporting them. The mortgage market was the most sensitive and fragile. It is here that the large part of US household debt was most concentrated, with debt per household rising 63% from 2001 to 2007, and with weak mortgage underwriting standards for higher-risk subprime mortgages (Bernanke et al. 2019). There was much optimism in the housing market, yet this was far from safe, given both the quality of the debt holders as well as the opaque derivative instruments that underpinned the debt. Although the crisis was initially confined to a small number of developed countries, it spread rapidly to affect the global economy (United Nations 2009). The origins of the financial crisis are rooted in global macroeconomic policies that affected liquidity, and a poor regulatory system that contributed to the crisis, despite its supposed role as a second line of defense against unscrupulous financial activities (BlundellWignall et al. 2008). The crisis exposed numerous fundamental problems in national regulatory systems that affected finance, competition, and corporate governance in developed countries (United Nations 2009). Effects There was initially some optimism that developing countries would be largely sheltered from the effects of the financial crash due to their marginalized status in the global economy and the fact that their financial sectors are relatively delinked from the international financial system. By mid-2007, a number of key multilateral agencies still held the view that the economic downturn experienced in parts of the developed world would largely bypass developing nations (International Labour Organisation [ILO] 2009). By September 2008, however, the depth and extent of the global economic crisis stemming from the collapse of numerous key financial markets across the world had intensified and was characterized by strong downward fluctuations in stock markets, reduced rates of economic growth, volatile exchange rates and decreasing flows of international trade and foreign direct investment (ILO 2009). In 2008, the collapse in global demand stemming from the financial downturn, coupled with “synchronised falls in manufacturing and industrial production, trade credit financing problems and low consumer confidence, triggered a fall in world trade growth to just 4 percent” (Balchin 2009). The economic crisis has been accompanied by a global

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jobs crisis that has seen the world’s unemployment rate rise to 7%, with an estimated 50 million people joining the ranks of the unemployed in 2009 (ILO 2009). State Responses In the US, the George W. Bush administration was responsible for the immediate response to the crisis and spearheaded the creation of a new global mechanism in the form of the G20 to coordinate economic responses. The US Treasury and the Federal Reserve were at the forefront of firefighting. Domestically, most important action taken by the Bush administration was the creation in October 2008 of the Troubled Asset Relief Programme, which helped to recapitalize the financial sector. The US Treasury also temporarily guaranteed money market mutual funds, halting the institutional run that had started in mid-September. Additionally, the Federal Deposit Insurance Corporation guaranteed senior bank debt, restoring confidence to overnight bank-lending markets and bringing bank-to-bank lending rates back to normal levels. Moreover, the Fed liquidity, coupled with a number of new Fed financing instruments— the Commercial Paper Funding Facility, the Term Asset-Backed Securities Lending Facility, and the purchase of housing-related assets created or guaranteed by Fannie or Freddie—helped to stem failing financial markets (Hennessey and Lazear 2013). It was left to President Barack Obama to deal with the economic fallout from the crisis, manage the resultant financial clean-up, and execute financial policy reforms. The Obama administration implemented a number of significant fiscal measures, notably the American Recovery and Reinvestment Act of 2009. It also offered strong moral support for the Federal Reserve, including the reappointment of Ben Bernanke at its helm. The administration restored the financial sector faster than expected and carried out a very successful rescue of the automotive sector (Wolf 2017). The US Treasury made short-term loans to Chrysler and General Motors, and the Obama administration forced these car firms into governmentdictated bankruptcies (Hennessey and Lazear 2013). It is worth noting that the Obama administration was interested in more than economic recovery. It also tried to move the US closer to universal health insurance, with the Affordable Care Act (“Obamacare”) adding an estimated 20 million adults and three million children to the insurance rolls. Overall,

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the administration rescued the US economy and bequeathed a solid foundation for its successor to build on. It drew criticism, however, for not “going all out to punish those whose malfeasance and irresponsibility blew up the financial system and economy” (Wolf 2017). Effects of Interventions The 2008/2009 global financial crisis, as well as the policy responses to it, transformed the global economy in profound ways. More than a decade since its outbreak, concerns have been raised about the lingering direct effects of the crisis: debt levels across industrialized countries, while declining, remain above where they were prior to the crisis. In 2018, gross debt across developed economies stood at 106% of GDP as of 2016, compared to 72% in 2007 (Wolf 2017). Moreover, although the banking sector in the US and Britain has written off non-performing loans, many eurozone banks have retained pre-2008 non-performing loans on their books. The World Bank (WB) estimates that over 4% of eurozone loans are still non-performing loans, with the number as high as 17% in Italy (Wolf 2017). The 2008/2009 crisis profoundly changed the architecture of economic policymaking. It elevated the political power and balance sheets of central banks, as they assumed expanded roles in regulating the financial system over and above managing monetary policy (Zhou and Nilsen 2020). Globally, this has been coordinated by the G20, conferring a significant level of legitimacy for an international body that represents a much broader group of countries than the exclusive G7 countries. What is more, following a short resurrection of Keynesian stimulus in 2009, including a US$787 billion stimulus package in the US, governments introduced austerity programs designed to secure fiscal consolidation and structural economic reform (Oxenford 2018). These are some of the key challenges policymakers will have to contend with in the coming decades. South Africa and the Two Crises: The Great Recession and the COVID-19 Pandemic The demand for South Africa’s exports fell thanks to the slowdown in global growth, leading to declining export receipts. In particular, South African exports declined significantly in 2009, with the country’s exports of goods and services as a percentage of GDP dropping back from

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35.4% in 2008 to 26.6% of GDP in 2009 (SADC Secretariat 2009). The decline in exports constrained South Africa’s external sector, reflected in a deterioration in terms of trade (SADC Secretariat 2009). The worldwide economic downturn also had a strong effect in terms of reducing the revenues of the South African government. Total government revenue (excluding grants) as a proportion of GDP declined from 26.4% in 2008 to 25.1% in 2009 (SADC Secretariat 2009). Furthermore, employment levels declined as the harmful effects of the global economic downturn took hold. This saw South Africa record substantial job losses, with close to one million jobs shed across the economy in 2009. South Africa’s mining sector was hardest hit by the global economic slump against the backdrop of acute contractions in commodity prices. The country recorded significant job losses in the mining sector, with 32 681 mining industry employees having been retrenched by July 2009 (SADC Secretariat 2009). The crisis was also felt in country’s agricultural sector, where prices of agricultural exports plummeted. In the final section of this paper, we assess the nature of the current crisis that the world is in, triggered by a health pandemic, and evaluate the strengths and weaknesses of the kinds of responses that we have seen so far from the South African government. In response to the COVID-19 pandemic, the South African government undertook various measures which are discussed in the different chapters that deal with labor market, monetary and fiscal policies, and social security and protection. It is worth highlighting some of the more cross-cutting and detailed set of policy programs that government initiated. The pandemic came at a time when the National Treasury had just released a document titled Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy (2019). This was an initiative led by the National Treasury to introduce a set of reforms that would unlock economic growth in an inclusive manner. The areas that were targeted for reforms include energy, in particular to accelerate the diversification of South Africa’s energy mix with renewable supply expanded, clear hurdles to spectrum auction, modernize the governance of transportation system and improve ports capacities, overcoming market concentration by large firms, improve the country’s trade profile, rethink the country’s industrial policies, and strengthen the macroeconomic environment and ensure that it supports microeconomic interventions. The strategy document was released to the public as government paper in August 2019. Seven months later, the country went on a hard

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lockdown in response to the COVID-19 pandemic. Many of the major themes that were set out in the National Treasury’s strategy document are analyzed in various chapters in this volume. The advent of the crisis meant that this strategy could not be implemented as planned. Despite the tough conditions that the government faced during this time, a delivery unit was created in October 2020, Operation Vulindlela, to manage coordination within government on implementation of key reform areas as well as to work with the private sector to identify those areas where synergies between the state and business could be achieved to unlock growth potential. This unit was shared between the National Treasury and the Presidency to catch up in removing obstacles to implementing economic reforms that were set out in the National Treasury paper. A month later, there was an update of the Economic Strategy paper in the form of the Economic Recovery and Reconstruction Plan that was led by the Presidency and which embedded most of the policy themes discussed in the National Treasury document with input from the Presidential Economic Advisory Council that was set up back in 2019 to advise the country’s president on economic policy. The main distinctions between the Economic Recovery and Reconstruction Plan and the National Treasury’s paper lay in additional aspects on possible social security framework, the more specific interventions that the government proposed to ameliorate deprivations as a result of COVID-19, and a timetable on how some of the interventions could be realized. Operation Vulindlela also increased the tempo of its work with the urgency of the Economic Recovery and Reconstruction Plan. Operation Vulindlela focused, in the main, on priority reforms aimed at addressing structural constraints on economic growth, including shortages of electricity, water, energy, skills, and delays at the port and freight rail system. It registered some success as broadband spectrum was finally auctioned by the telecoms regulator in March 2022 (see Chapter 10 in this volume), dedicated attention was given by the government to challenges at the ports, there was a lifting of the threshold of embedded generation of renewable energy to 100 MW without the requirement of a license, and the water use licenses were also reformed at the beginning of 2022. Although these are modest reforms, they potentially create a bridgehead for waves of reforms. The South African economy remained anemic two years after the onset of the pandemic, with debt-to-GDP ratio at above 70%, and unemployment at 34%. The social contract in South

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Africa faces severe test as shown in episodes of uprisings and rise in xenophobic attacks. The challenges and opportunities for strengthening the countries’ social compact are discussed in Chapter 11. What has been lacking, however, are bold actions that should create large-scale economic opportunities for the marginalized communities, overcome the problem of concentration in the economy, broaden opportunities for small and medium-sized enterprises, and lay out a comprehensive social security program that complements job-creation opportunities. The effects of the pandemic-induced economic crisis may be felt for many years to come in the absence of bold measures for economic transformation and social protection. We have highlighted in this chapter some of the major obstacles to such interventions. These include governance weaknesses, weak capabilities in the state, and poor coordination in key government departments.

Lessons for South Africa Health Crises Lessons gleaned about the health and economic crises analyzed in this chapter highlight how the South African government can capitalize on the COVID-19 crisis to catalyze the enactment of long-delayed socioeconomic reforms in order to realize structural change. Some of the discussions on the more specific interventions, for example industrial policies are laid out in Chapter 3 which discusses industrial and competition policy and Chapter 6 that proposes monetary and fiscal policy measures. Interventions in South Africa will need to take into account the deepseated socio-economic challenges that predate the pandemic, and the fragmented nature of the healthcare system. The majority of the citizens access the healthcare system through the public sector, with a few able to afford the relatively better resourced private sector. According to a report by the World Health Organization (WHO), the private health sector serves 16% of the population, whereas the public sector serves 84% (WHO 2015). The South African government set in motion a process to establish a National Health Insurance (NHI) Fund, with the NHI Bill gazetted in July 2019. The purpose of this legislative step is to create a unified health system by improving equity in financing, reducing fragmentation in the funding pools, making healthcare delivery more affordable and accessible,

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and to ensure that all South Africans have access to comprehensive quality healthcare services (National Health Insurance Bill 2019). The NHI is billed to come into existence in 2026. The pandemic should be used to drive the needed changes to capacitate the healthcare system, improve quality levels, and to ensure universal coverage on an affordable basis. The previous pandemics induced changes in the South African health system, albeit to create a fragmented system that was framed along racially discriminatory laws and practices. Today, government has an opportunity to use the pandemic to introduce significant reforms in the healthcare system to serve the majority of the citizens. Looking at history and some of the lessons it holds for South Africa, the Spanish flu had the widest global reach and highest fatality rate in modern history. In South Africa, it had a devastating effect at a time when the new Union government was still contending with the social consequences of the South African War. The effects of the war led to the uprooting of Afrikaner farming communities from the countryside to the urban areas in search of work, a situation that amplified what would later be characterized as the “Poor White Problem.” The “Poor White Problem” acted as a spur for far-reaching reforms and dogged state interventions designed to ameliorate the socio-economic plight of the Afrikaner community, creating employment and providing housing and public health care. The Spanish flu pandemic highlighted the inadequacies of state provision of health facilities in South Africa, while it also demonstrated how a crisis could accelerate the development of a public health system. The SARS pandemic bore similarities to COVID-19. However, unlike COVID-19, the lockdown periods were significantly shorter and limited to a few countries during the outbreak. National governments, notably Singapore, responded effectively to the SARS pandemic and subsequently prepared themselves for future pandemics. The resources that were deployed and institutions built during this crisis were put into good use during the COVID-19 pandemic. A key lesson from the Singaporean experience in dealing with SARS is that public health interventions that are undertaken today, including the need to build for greater resilience of the public health system, must be made with the future in mind. There are several lessons that can be drawn from the aforementioned health crises. Firstly, the funds borrowed by the South African government from various multilateral development banks could be channeled toward long-delayed social reforms, particularly in providing the basic

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infrastructure that is central to curbing disease, both now and in the future. A focus on improving public health infrastructure is even more urgent now that its weaknesses have been so starkly revealed. Crucially, the state should build a quality and resilient public health system that is properly funded and accessible. This will also require more attention to be given to upgrading human capital, improving the quality of managerial expertise, and strengthening operational efficiencies. Getting the right skills to do the work and providing the necessary institutional support are some of the key success factors for a thriving healthcare system. Secondly, it is important to build centers of excellence that are driven by government. There are existing examples in South Africa that need to be built upon, such as the Technology Innovation Agency, the Council for Scientific and Industrial Research (CSIR), the Agricultural Research Council, the State Information and Technology Agency (SITA), and the Centre for Public Service Innovation, among others. Some of these have not worked optimally, with their effectiveness being hampered by funding deficiencies and leadership challenges. Centers of excellence established by government must be given the space to think out of the box to propose solutions. Such solutions should be based both on lessons from the current pandemic and models of future pandemics. Strong interdepartmental and inter-agency collaboration is a key success factor, as are strong capabilities within the state. It is one thing to have centers of excellence, and another to process their insights and advice to practical policy outcomes. For this reason, the state has to be capacitated with policy implementors who are equally capable of interpreting and implementing the innovations emerging from these centers of excellence. Collaboration with the private sector and research institutions becomes critical in this area, especially in-kind contributions such as secondments of technical expertise for defined periods of time to bolster expertise. Thirdly, community interventions should be depoliticized. One of the weaknesses of local government politics in South Africa is the politicization of community organizations. The scenes that played out when government decided that distribution of food parcels during COVID-19 should be handed to political party councillors diminished trust between communities and the state. Reports of parcels not reaching the intended beneficiaries or being channeled to party sympathizers created animosity between state and society, thus making it even more difficult for the state to secure the community’s will to participate in the state’s prevention and testing plans. Corruption and mismanagement of funds at the local level

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have been a major factor triggering a cauldron of discontent. As long as this is not addressed decisively—through carrots and sticks of budgetary allocation from the center and through law enforcement agencies—this mistrust will remain, if not expand. The crisis offers an opportunity for government to explore possibilities for collaboration with community-based organizations and social enterprises as delivery mechanisms, as well to build trust with communities. Importantly, it should force a rethink of the different levels by local, provincial, and national government, especially local and provincial governments, which are at the sharp end of public service delivery. The local government level is plagued by inefficiencies and corrupt practices, whereas the provincial level plays a coordinating role, with limited competencies in certain social services, some of which are shared with national government. The dire state of municipalities is borne out in the statement of the Finance Minister, Tito Mboweni, during his 2021 budget vote. According to Mboweni (2021), there were 163 municipalities in 2021 that were in financial distress, 40 municipalities in financial and service delivery crises, and 102 municipalities that had adopted budgets that they cannot fund. This demonstrates the extent to which state capacities need to be shored up, with disciplinary measures instituted against underperformers. As we have discussed in previous sections, the Great Depression in the US awakened government to the importance of the local structures of governance for driving infrastructure and socio-economic interventions. This is a task of mission-oriented leadership and sound execution capacities across government. Lastly, the current institutional arrangements of the public health system in South Africa need to be reviewed, as it has become clear that capacity weaknesses are severe. The key lesson for the National Health Insurance is funding constraints, which should be addressed in parallel with improving the capabilities of the provincial governments and local municipalities. Singapore’s decade-long planning and investment to develop the requisite infrastructure in the form of a dedicated infectious disease hospital and specialized infectious disease wards in all hospitals, as well as the training of more epidemiologists to deal with pandemics after the country’s shortcomings during SARS, yielded positive returns when COVID-19 struck. South Africa, on the other hand, had to rapidly designate public hospitals as COVID-19 treatment centers, some of which—like Tembisa hospital, where a prominent case of neglect

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was reported—were already struggling with the provision of healthcare services pre-pandemic. Economic Crises The cases of both the Great Depression and the global financial crisis of 2008/2009 have emphasized the primacy of the state in responding decisively and comprehensively to economic crises, as well as setting the basis for post-crisis reconstruction. These economic crises prompted national governments to embrace and enact unorthodox fiscal and monetary policies to revive their troubled economies. National states became a powerful force to drive social and economic change, as well as shore up institutions. The core preoccupation of the intercessions by various governments was employment at all cost, even if it meant that some of the activities were uneconomic. The focus was on public expenditure to increase output, employment, and the purchasing power of workers as a means to stimulate demand in the economy. Fiscal stimulus, employment creation, and an increase in aggregate demand were thus central to recovery efforts. The suspension of the gold standard in 1931 had adverse economic effects on South Africa. The Second World War galvanized South Africa to accelerate manufacturing, starting with munitions, arms, and other critical supplies. In the aftermath of the war, South Africa built its industrial capabilities and expanded its agricultural productivity. The war acted as an anchor to ignite economic recovery, and import tariffs played a key role in nurturing the development of an industry in its infancy. The various institutions created by the state in the 1920s right through to the 1950s—particularly Eskom, Iscor, and the IDC—helped to support a manufacturing path. In the US, the Obama administration responded to the worldwide financial crisis of 2008/2009 by implementing, among others, significant fiscal measures, restoring the financial sector and successfully rescuing the automotive sector. In South Africa, the state policy responses to the crisis included fiscal stimulus measures, initiatives and programs aimed at tackling job losses, as well as measures implemented to assist distressed sectors and firms. The 2008/2009 global financial crisis, as well as the policy responses to it, transformed the global economy in profound ways. In particular, it profoundly changed the architecture of economic policymaking.

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The central observation to make about the preceding analysis of various crises in the course of history is that the state must take the lead in responding to and quelling crises; in doing so, it will need to work with important agencies in society, including businesses, communitybased organizations, and other not-for-profit entities that undertake development activities. Although South Africa is faced with unique national circumstances, there are general lessons it can draw upon from these historical experiences. In tackling the COVID-19 pandemic, South African policymakers can deploy these lessons as a framework for shaping future economic policy and strategy in order to overcome the effects of the COVID-19 pandemic and orchestrate national economic recovery. Beyond determined leadership, enacting sound public policies, as well as building sound institutions and upgrading their capabilities, is pivotal to realizing the desired outcomes. The policy measures implemented by the South African government in response to the global economic crisis of 2008/2009 can be organized according to the following broad areas: fiscal stimulus measures; initiatives and programs aimed at tackling job losses; and measures implemented to assist distressed sectors and firms. In broad terms, South Africa and Mauritius launched the most substantial targeted measures in response to the global financial crash. Set out in a document titled “The Framework for South Africa’s Response to the International Economic Crisis” (The Presidency 2009), South Africa’s policy response involved a range of social partners including organized labor, the business sector and government. As a core component of its policy response, the South African government maintained its commitment to public spending as a way to bolster flagging levels of expenditure throughout the economy. This included a pledge to continue, and expand, its R787 billion public investment plan to March 2012 (The Presidency 2009). In order to address the problem of widespread job losses, the South African government intervened directly in the labor market through the establishment of a R2.4 billion Training Lay-off Scheme, which subsidized “the salaries of workers at risk of being laid off for a set period during which they will benefit from retraining programmes” (The Presidency 2009). Moreover, South Africa defined an expanded role for development finance institutions in bailing out and refinancing firms in distress, especially those located in the employment-intensive automotive,

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clothing and textile, mining and capital equipment sectors. This assistance formed part of sector-specific strategies designed to provide a rescue package for the distressed sectors in the economy.

Conclusion This chapter has set out to delineate global historical lessons that South African policymakers can deploy as a framework for shaping the future economic policy and growth trajectory. The most salient lesson is that the state has a central role to play in tackling health and economic crises, and in laying the foundation for post-crisis reconstruction. The South African government can exploit the COVID-19 emergency to enact longdelayed structural reforms to reverse the country’s economic stagnation and propel a new post-COVID-19 growth path. This will require significant improvements in state capacities across the different spheres of government. There should be no holy cows in rationalizing the different layers of government. We have illustrated the power of purposeful state action, with various examples from the health pandemics of the twentieth and twenty-first centuries, the depression of the 1930s, and the war pressures of the late 1930s. These crisis moments brought a great sense of urgency for the state to mobilize its fiscal resources, including debt instruments, to build back better. Clear sectoral winners were agriculture and manufacturing; development finance institutions such as the Land Bank (and various credit boards) and the Industrial Development Corporation were crucial financing instruments to drive commercial agricultural development and manufacturing. There are options that are open to the state today. In the realm of public health, the state can channel funds secured from multilateral development banks to provide scientific and other infrastructures that are key to building the resilience of the national health system against future pandemics. Government must have a clear and purposeful strategy to shore up the national innovation system and strengthen the country’s centers of excellence so as to ensure the country’s scientific and technological base. Further, there is a need for local authorities to depoliticize community interventions. Without depoliticization of these interventions, the government will struggle to secure community participation in its prevention, testing, and vaccination plans. Furthermore, the institutional edifice

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of the public health system needs to be reconfigured, and funding constraints ought to be dealt with in tandem with bolstering the institutional capabilities of both provincial and local governments. In the economic sphere, the South African government ought to recognize the unprecedented severity of the COVID-19 global pandemic and even be prepared to implement unorthodox fiscal and monetary policies to revitalize the country’s beleaguered economy. The fundamental preoccupation of its interventions must be to protect jobs, support the development of local production capacities, and ameliorate social dislocations caused by the crisis. This will require that government prioritize public expenditure to grow output and stimulate economic demand. The regional market offers an avenue for the country’s exports. Fiscal stimulus, employment creation and protection, as well as raising aggregate demand, must be pivotal to recovery efforts. Importantly, the country needs to pick sectoral winners and a few economic activities that can enable it to achieve these goals. The COVID-19 crisis provides a historic opportunity for the South African government to drive change and fundamentally alter the structure and growth path of the South African economy. However, this cannot happen in the absence of strong state institutions. The global pandemic has exposed serious state capacity constraints that have paralyzed governance in South Africa. It has also amplified already known governance failures, vividly dramatized by the disastrous collapse of state institutions in several provinces under the weight of the pandemic. This has exerted a devastating human and economic toll on the country. Without meritocratic, competent, professional, and corruption-free public institutions, the South African government will fail to implement far-reaching structural reform of the country’s political economy.

References Balchin, N. 2009. The impact of the global financial crisis in Africa. Africagrowth Agenda (7). https://hdl.handle.net/10520/EJC17267. Bass, W.D. 2020. Did the Spanish flu cause the great depression? https://willia mdudleybass.com/spanish-flu-great-depression. Bernanke, B.S., T.F. Geithner, and H.M. Paulson. 2019. Firefighting: The financial crisis and its lessons. New York: Penguin.

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Blundell-Wignall, A., P. Atkinson, and S.H. Lee. 2008. The current financial crisis: Causes and policy issues. https://www.oecd.org/finance/financial-mar kets/41942872.pdf. Campbell, A. 1943. Smuts and Swastika. London: Victor Gollanc. Davenport, T.R.H. 1977. South Africa: A modern history, 2nd ed. London: Macmillan. De Kock, G. 1954. A history of the South African Reserve Bank 1920–1952. Pretoria: Van Schaik. Galbraith, K. 1994. The world economy since the wars. London: Houghton Mifflin. Graham-Harrison, E. 2020. Experience of SARS a key factor in countries’ response to coronavirus. The Guardian, March 15. https://www.thegua rdian.com/world/2020/mar/15/experience-of-sars-key-factor-in-responseto-coronavirus. Gross, S. 2020. Economist who said SARS cost $40 billion sees bigger hit now. Bloomberg, January 31. https://www.bloomberg.com/news/articles/202001-30/economist-who-said-sars-cost-40-billion-sees-bigger-hit-now. Hennessey, K., and D. Lazear. 2013. Who really fixed the financial crisis? Politico, September 13. https://www.politico.com/story/2013/09/who-really-fixedthe-financial-crisis-096794. Houghton, H.D., and J. Dagut. 1973. Source material on the South African economy 1960–1970, vol. 3. Oxford: Oxford University Press. International Labour Organisation (ILO). 2009. The global economic crisis and developing countries: Transmission channels, fiscal and policy space and the design of national responses. Employment Working Paper No. 36. Geneva: ILO. Jacobs, A. 1948. South African heritage: A biography of H.J. Van Der Bijl. Pietermaritzburg: Shuter & Shooter. Kindleberger, C.P. 2000. Manias, panics, and crashes. New York: Wiley. Lai, L. 2019. New infectious disease centre tracks everyone in the building in case of outbreak. The Straits Times, September 7. https://www.straitstimes. com/singapore/health/new-infectious-disease-centre-tracks-everyone-in-thebuilding-in-case-of-outbreak. Mboweni, T. 2021. Budget vote 8. National treasury, May 20. http://www. treasury.gov.za/comm_media/speeches/2021/Budget%20Vote%20Speech% 20by%20the%20Minister%20of%20Finance%20Tito%20Titus%20Mboweni,% 20MP%20%20%20National%20Treasury%20The%20Pillar%20of%20the%20S tate%20-%2020%20May%202021.pdf. Morris, C. 2017. A rabble of dead money—The great crash and the global depression 1929–1939. New York: Public Affairs.

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National Health Insurance Bill. 2019. Government Gazette No. 42598, July 26. https://www.gov.za/sites/default/files/gcis_document/201908/ national-health-insurance-bill-b-11-2019.pdf. National Treasury. 2019. Economic transformation, inclusive growth, and competitiveness: Towards an economic strategy for South Africa. http:// www.treasury.gov.za/comm_media/press/2019/towards%20an%20econ omic%20strategy%20for%20sa.pdf. NCID National Centre for Infectious Diseases. 2021. High level isolation unit. https://www.ncid.sg/Facilities-Services/Wards-Room-Types/Pages/HighLevel-Isolation-Unit.aspx#:~:text=The%20High-Level%20Isolation%20Unit% 20%28HLIU%29%20is%20sited%20within,spread%20from%20person%20to% 20person%2C%20such%20as%20Ebola. Ng, J.S. 2020. The big read: 17 years on, Singapore puts SARS lessons to the test in fight against Wuhan coronavirus. Channel News Asia, February 3. https://www.channelnewsasia.com/news/singapore/singaporesars-lessons-wuhan-coronavirus-virus-plans-lessons-12380842. Oxenford, M. 2018. The lasting effects of the financial crisis have yet to be felt. Public Financial Focus. https://www.publicfinancefocus.org/opinion/2018/ 01/lasting-effects-financial-crisis-have-yet-be-felt. Phalan, T., D. Yazigi, and T. Rustici. 2012. The Smoot-Hawley tariff and the great depression. Foundation for Economic Education. https://fee.org/art icles/the-smoot-hawley-tariff-and-the-great-depression/. Pells, R. n.d. Great depression. https://www.britannica.com/event/Great-Dep ression. Phillips, H. 1987. The local state and public health reform in South Africa: Bloemfontein and the consequences of the Spanish ‘Flu Epidemic of 1918. Journal of Southern African Studies 13 (2): 210–233. Special Issue on The Political Economy of Health in Southern Africa (January). Phillips, H. 2020. South Africa bungled the Spanish flu in 1918. History mustn’t repeat itself for COVID-19. The Conversation, March 10. https:// theconversation.com/south-africa-bungled-the-spanish-flu-in-1918-historymustnt-repeat-itself-for-covid-19-133281. Romer, C. 1988. The great crash and the onset of the great depression. National Bureau of Economic Research, Working Paper 2369. https://www.nber.org/ papers/w2639. Roux, E. 1948. Time longer than rope. Wisconsin: The University of Wisconsin Press. SADC Secretariat. 2009. Update on the impact of the global economic crisis on the SADC region. Singapore Government. 2020. Singapore’s preparedness for infectious diseases. https://www.gov.sg/article/singapore-preparedness-for-infectious-diseases.

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Smith, E. 2021. Roaring 20s’ after the pandemic? Big banks warn be careful what you wish for. The Davos Agenda, CNBC. https://www.cnbc.com/ 2021/01/27/roaring-20s-after-the-pandemic-big-banks-warn-be-carefulwhat-you-wish-for.html. Steyn, R. 2020. Seven votes: How WWII changed South Africa forever. Johannesburg: Jonathan Ball. Tanner, B. 2018. How a Killer Flu spread from Western Kansas to the world. AP News, February 23. https://apnews.com/article/428151df24f841619b c93985579ea7bf. Taylor, B. 2020. The Spanish flu and the stock market: The pandemic of 1919. Global Financial Data, February 27. https://www.globalfinancialdata.com/ the-spanish-flu-and-the-stock-market-the-pandemic-of-1919/. The Presidency. 2009. Framework for South Africa’s response to the international economic crisis, 19 February. The Stiglitz Report. 2010. Reforming the international monetary and financial systems in the wake of the global crisis. New York: The New Press. Tsoucalas, G., A. Kousoulis, and M. Sgantzos. 2016. The 1918 Spanish flu pandemic, the origins of the H1N1-virus strain, a glance in history. European Journal of Clinical and Biomedical Sciences 2 (4): 23–28. https://www.res earchgate.net/publication/314079733_The_1918_Spanish_Flu_Pandemic_ the_Origins_of_the_H1N1-virus_Strain_a_Glance_in_History. United Nations. 2009. Report of the commission of experts of the president of the United Nations general assembly on reforms of the international monetary and financial system. https://www.un.org/ga/econcrisissummit/docs/FinalR eport_CoE.pdf. Walker, E. 1963. The Cambridge history of the British Empire, vol. 8, 2nd ed. Cambridge: Cambridge University Press. Wilson, M., and L.L. Thompson. 1975. The Oxford history of South Africa, vol. 2. Oxford: Oxford University Press. Wolf, M. 2017. How Barack Obama rescued the US economy. Financial Times, January 10. https://www.ft.com/content/b5b764cc-d657-11e6944b-e7eb37a6aa8e. World Health Organisation (WHO). 2015. Minimum data sets for human resources for health and the surgical workforce in South Africa’s health system: A rapid analysis of stock and migration. Geneva: WHO. https://www.who. int/workforcealliance/031616south_africa_case_studiesweb.pdf. Zhou, L., and E. Nilsen. 2020. This one is scarier: Obama-era officials say current economic crisis is fundamentally different from 2008. Vox, March 30. https://www.vox.com/2020/3/30/21191352/coronavirus-eco nomic-crisis-2008-obama-administration.

CHAPTER 3

Building State Capacities and Dynamic Capabilities to Drive Social and Economic Development: The Case of South Africa Mariana Mazzucato, Mzukisi Qobo, and Rainer Kattel

Introduction Crises can act as critical junctures and be a spur for long-term social and economic change. This has been the case with previous crises in history from the Great Depression to the Global Financial Crisis of 2008. The health pandemics of the past, from the Black Death of the fourteenth

M. Mazzucato · R. Kattel University College London, London, UK e-mail: [email protected] R. Kattel e-mail: [email protected] M. Qobo (B) Parktown, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_3

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century to SARS pandemic of the late twentieth century, imbued governments with a new sense of mission to change how economic and social infrastructure is configured. Crisis and pandemics can bring the society together around a common purpose, but we know from history that such critical junctures can also divide societies and propel them into chaos. Learning the right lessons and being able to galvanize society for positive change is thus one of the key tasks for governments during the ongoing pandemic. This takes bold leadership to carry out transformative programs that could not be achieved during normal times. The task of leadership is also to overcome inefficiencies and corruption. Some of the recent literature on South Africa has cast spotlight on how embedded the practice of state capture (a form of corruption facilitated by powerful figures within the state) has been in South Africa’s state formation (Chipkin and Swilling 2020), and how this has exacerbated institutional decay (Jonas 2019). Jonas, in particular, looks at how these practices have undermined the social contract that was achieved at the advent of democracy in South Africa in 1994. Examples of institutional decay as well as decimation of capacities within state-owned enterprises are discussed extensively in the works of Hofstatter (2018) and Mashele and Qobo (2014). The testimonies presented at the ongoing Zondo Commission of Inquiry into State Capture provide the clearest example of how state capacity has been undermined by various forms of corrupt practices that were sanctioned at the top echelons of the state before 2018. It is thus impossible to consider strategies for building state capacity without addressing corruption and infusing the state with a different ethos that is mission-oriented. The COVID-19 pandemic offers the South African government with an opportunity to overcome these weaknesses, replenish the capacities of the state, and implement the social and economic changes that were planned but never brought to fruition. This requires a clear sense of purpose that defines a compelling narrative for transformative change and the necessary institutional capacities and capabilities that can deliver such change. South Africa has a rare opportunity in the context of the COVID-19 pandemic and the economic crisis that this has triggered to do everything possible to drive major economic change across the various levels in government as well as in its state-owned enterprises and other delivery agencies. The government has an opportunity to “build back”

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based on a new mission centering on greater economic inclusion, overcoming the spatial legacy of apartheid, delivering social and economic infrastructure to both improve the quality of government services and enable new economic activities including those aimed at generating green growth to thrive, building institutional capacities for the public sector and skills for the economy, promoting small and medium enterprises, and accelerating digital transformation. Many of these objectives are expressed in government policy documents such as the National Development Plan of the National Planning Commission and the recent Economic Strategy of the National Treasury, which has been extensively discussed in Chapter 2. What this paper aims to do is identify the implementation bottlenecks and articulate these objectives in the form of coherent policy missions and define the institutional framework that would deliver the desired outcomes. The conceptual lens that we adopt in this paper is organized around the hierarchy of public sector administration and the imperative of building dynamic capabilities to improve implementation of chosen strategic missions and related programs; innovation in public service, especially with respect to coordinating activities that yield outcomes in defined localities, but very much driven by a set of missions; and the idea of a developmental state whose aim is to achieve both greater efficiencies and equity outcomes. These three analytic features are interrelated. Even when the state has defined the best missions to pursue, if it lacks dynamic capabilities, it will not achieve such missions. Where developmental outcomes or equity objectives are weakly articulated, the state may find itself pursuing efficiency goals that pander to market interests, assuming the character of good governance without the effectiveness that can only come through social inclusion and equity. The paper is divided into six sections. The first provides conceptual framing to look at solutions to state capacity beyond merely fixing administrative weaknesses within the state or fixing market failures. We offer a view of state capacities that is rooted in the idea of critical missions outcomes. The second section assesses public sector effectiveness in South Africa, looking at challenges and opportunities bolster state capacities for governance effectiveness. Third, we discuss options for building capacities in state-owned enterprises and exploring the transformative potential of these entities. The fourth provides insights on what institutional quality for state capacity should look like in the South African context. This then

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builds to the fifth section that focuses on building institutional capacities at the local government level, a discussion that continues to the last section that thinks about institutional capacities in the context of the District Development Model that is anchored by the Department of Cooperative Governance and Traditional Affairs (COGTA). The Conceptual Lens: Long-Term Capacities, Dynamic Capabilities, Innovation, and Developmental Missions Effective governance requires capacities for resilience and capabilities for agility. Public sector capacity is typically defined as the set of skills, capabilities, and resources necessary to perform policy functions, from the provision of public services to policy design and implementation (Wu et al. 2018). The capacities associated with the public sector tend to be narrow and focus on stability (i.e., continuity, transparency, predictability of services and interventions) and sources of dynamisms are often seen to be external to the public sector (i.e., private sector practices or individual leaders). The conception of capacities needs to be complemented by the understanding of dynamic state capabilities. While there is a rich literature about firm-level dynamic capabilities (Teece and Pisano 1994), there has been insufficient attention paid to where the equivalent level of public sector capacity comes from and its dynamic evolution over time (Mazzucato and Kattel 2020). Instead, over the years the idea that the public sector should at best fix market failures and seek the same level of efficiency in the private sector has taken hold. An approach wedded to static efficiency and “fixing” does not justify the investment in the internal capabilities to co-create value (Mazzucato 2018b). This type of thinking has mainly been influenced by public choice theory and the development of new public management (NPM), or new public administration, in US business schools. NPM, which gathered momentum in the 1980s, basically argued that governments should adopt private sector strategies to maximize value in the public sector. NPM policies were widely implemented in advanced economies in the 1980s and 1990s, in particular in the UK, New Zealand, and Australia (Hood 1991). By the mid-1990s, however, concerns were growing about its appropriateness (Drechsler 2005). Yet, as Lapuente and Van de Walle have recently argued, “Administrations all over the globe have taken measures in the three main themes of NPM: competition between public

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and private providers, incentives to public employees and the disaggregation of public organisations” (Lapuente and Walle 2020). However, deregulation, shareholder value, and new government practices, such as setting up arm’s-length agencies and outsourcing, did not always work as well as theory said they should. In development theory and practice, the market-failure-based approaches coalesced in the 1990s around the so-called Washington Consensus policies focused on deregulation, opening up of domestic markets and relying on foreign direct investments and exports to drive economic transition and growth (Williamson 2002). The main assumption of the Washington Consensus was that as all development problems are of the same nature, the solutions are bound to be the same as well. This removes the question of directionality of growth from domestic policy-making and leaves global markets in charge. Since then, while there have been attempts at going beyond NPM (Moore 1995) and the Washington Consensus (Rodrik 2006), a proper framework has not been developed that can understand how the state is responsible not only for fixing markets but also for shaping and co-creating them—and the capacities and capabilities needed to do that (Mazzucato et al. 2020). The key to the idea of capacities and capabilities in the public sector is based on building complementarities or partnerships with other social and economic actors. This entails showing the direction, through various policy options, that would allow private sector and society to explore and exploit existing and new economic and technological potential. In other words, partnerships are fundamental for creating spaces where to invest and innovate. This approach to problems can apply across different state agencies including state-owned enterprise and public administration at different levels of government. To be sure, in its various policy positions, the governing party, the African National Congress (ANC), has proposed various approaches to building state capacities. In 1992 the ANC released a “Ready to Govern” document setting out key themes that would inform its policy positions and approach to public administration. As part of this document, the ANC sought to outline a vision of redistribution to meet the basic needs of the citizens, the restructuring of the economy on the basis of clearly defined growth and development strategies. In this document, the ANC also set out policy guidelines on the future developmental state. It asserted that the developmental state would “…have ultimate responsibility – in cooperation with the trade union movement, business and other organs of civil society – for coordinating, planning and guiding

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the development of the economy towards a sustainable economic growth pattern. Emphasis will be placed on macro-economic balance, including price stability and balance of payments equilibrium.” Some of these strategies were set out in the 1994 Reconstruction and Development Programme (RDP), which would later be assumed under the Growth, Employment and Reconstruction (GEAR) framework in 1996, which acted as a home-grown macroeconomic stabilization plan. One of the key programs of the RDP was to build human and technical capabilities (RDP 1994, 8–9). These earlier efforts under-estimated the magnitude of the social legacy of apartheid especially on the country’s human resource development as well as more specifically limited capabilities within the public administration. The latter was fragmented along the homeland (‘Bantustan’) system that was created under apartheid government and had to be integrated as one public service under the new democratic order in the early 1990s. The traces of this legacy are still present in South Africa public administration, and weaknesses have been worsened by the rising incidents of corruption especially between 2007 and 2018 as evident in Zondo Commission of Inquiry into State Capture. The state alone will not be able to solve all the challenges facing the country, even with the best of, given limited capabilities. Building partnerships across various social sectors will thus be very important. Such partnerships require relatively long-term mindset and policies, spanning a typical electoral cycle or two, and often summarized in national development and innovation strategies. However, all too often such strategies remain vague and non-committal because governments actually lack capacities and capabilities to implement them. We show this—as well as solutions—below when discussing public administration and state-owned enterprises in South Africa. We argue that through well-defined ambitious goals, or more specifically “missions,” that are focused on solving important societal challenges, policymakers have the opportunity to determine the direction of growth by making strategic investments, coordinating actions across many different sectors, and nurturing new industrial landscapes that the private sector can develop further (Mazzucato 2016). This “mission-oriented” approach to policy-making is not about topdown planning by an overbearing state; it is about providing a direction for growth, increasing business expectations about future growth areas, and catalyzing activity—self-discovery by firms—that otherwise would not happen (Mazzucato and Perez 2014). It is not about de-risking and leveling the playing field, nor is it about supporting more competitive

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sectors over less, since the market does not always know best, but about tilting the playing field in the direction of the desired societal goals, such as the SDGs (Sachs et al. 2019). However, we argue, to achieve this requires a new analytical framework based on the idea of public value and a policy-making framework aimed at shaping markets in addition to fixing various existing failures. Such long-term market-shaping activity by governments requires agile stability: internal dynamism and learning in policies, services, institutions, and organizational formats complemented by the ability to maintain stability to patiently implement policies and deliver services expected from the state (Drechsler and Kattel 2020). Market-shaping capacities and capabilities need to rest on a positive theory of public value that begins with a notion of the public good not as a correction to a failure, but as an objective in itself—an objective that can only come about if linked to a process through which value is created (Mazzucato and Ryan-Collins 2019). Key here is the emphasis on value creation at the core: not “public” value but value itself—with a clear delineation of the role of the different actors that are central to its formation. This may be expressed differently depending on the state agency. Delivering value in a state-owned enterprise may entail taking a lead in supplying critical public infrastructure or service, especially in areas where the private sector would not invest on its own; in some instances, it may be expressed through organizing and directing state investments in research and development; or by stimulating the ecosystem for small and medium enterprises through ramping up finances (through development finance institutions) in instances where private capital is held back. In the context of local government, the state could direct resources toward creating a system of innovation and improving how social and economic infrastructure are delivered—at times through collaboration with other stakeholders. Here, what is of significance is setting out a clear mission and identifying the desirable outcomes. While in economics value is, in essence, created inside businesses and only facilitated by the public sector, in this view value is co-created and requires a stakeholder understanding of capitalism itself across different levels of the state. This more collective view of value underpins a different understanding of the market itself, with the market as an outcome of the interactions of individuals, firms, and the state. And if value is created collectively, a first question becomes: What capabilities, resources, and capacities are needed for this value to be created inside all the different

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organizations, including those in the public sector, private sector, and civil society? A key success of past market-shaping policies, such as the missionoriented policies of the Moonshot era, has been setting a clear direction for problems to be solved (e.g., going to the moon and back in one generation), which then required cross-sectoral investments and multiple bottom-up solutions, some of which inevitably fail. Too much top-down can stifle innovation and too much bottom-up can make it dispersive with little impact. Crucially, in the case of South Africa, replication of institutional agencies of the state that are all focusing on the same problem has in the past inhibited delivery. This has been the case, especially, in the economic cluster of government departments. Policies tackling grand challenges should thus be broad enough to engage the public, enable concrete missions, and attract cross-sectoral investment, and remain focused enough to involve industry and achieve measurable success. By setting the direction for a solution, missions do not specify how to achieve success, but rather stimulate the development of a range of different solutions to achieve the objective. In other words, missions guide entrepreneurial self-discovery. Importance of Public Value Missions need to rest on a positive theory of public value that begins with a notion of the public good not as a correction to a failure, but as an objective in itself—an objective that can only come about if linked to a process through which value is created (Mazzucato and Ryan-Collins 2019). In this sense, a new building block is needed to guide and legitimize public policy. The criteria for selecting missions adopted by the European Commission, after widespread stakeholder consultation based on the “Missions Report” (Mazzucato 2018a), are that they should: • be bold and address societal value; • have concrete targets: you know when you get there! • involve research and innovation: technological readiness over limited time frame; • be cross-sectoral, cross-actor, and cross-disciplinary; • involve multiple competing solutions and bottom-up experimentation.

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Thus, the emphasis of both long-term capacities and dynamic capabilities is on building collaboration between state and business. In the context of development thinking, the concept of public sector capacity has been previously applied either through the lenses of state legitimacy, single key agency or capabilities to absorb international aid and technological change. Such frameworks lead public sector to develop capacities for short-term efficiency gains at the expense of both long-term vision-setting and the ability to take onboard the uncertainties and risks of innovation. Our view is that these approaches and frameworks are inadequate for solving key socio-economic challenges, as has been laid bare by the COVID-19 crisis. For South Africa, this particular crisis should help to build capabilities that will make society and the economy resilient for the future. Improving skills in the public service—rather than fixating only on reducing the headcount—and defining in more precise terms the kind of missioncritical outcomes the state seeks to pursue are key success factors. The very important point about building state capabilities is having a clearly laid out mission, or set of missions, and identifying the resources and sets of relationships that are required to bring the mission to fruition. The next section will look at various challenges and opportunities to building state capacities and set out an outline that can help organize policy interventions. Public Sector Capacities and Capabilities in South Africa: Diagnosing the Challenges and Opportunities The retrenched market-fixing state marked South Africa’s first decade of democracy. There were two fundamental tensions that characterized the emphasis on macroeconomic stabilization and growth. The first is what is sometimes defined as the pro-poor agenda or transformation objectives. The second is related to attracting foreign investment, ensuring economic growth, and modernizing the economy. These are not naturally contradictory; indeed the latter, specifically high growth, is often required to generate sufficient resources for meaningful state-led redistribution to take place. But the locus of tension is in the perceived emphasis of economic policy priorities or the direction of growth. Macroeconomic stabilization was made necessary by high levels of debt that was accumulated by the apartheid government especially since the 1980s as the economy was buckling under sanctions. Fiscal resources for delivering on

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the basic needs approach of the RDP, which included overcoming poverty and improving the quality of life of the citizens were constrained. In addition, the new government had to put the macroeconomic house in order and create a better basis for sustained economic growth and equity while also rebuilding the public services. The best mechanism for the state to overcome the residual tension between growth and equity is by conceiving itself in developmental terms through “embedded autonomy” (Evans 1995) or as an “entrepreneurial state” that not only takes cue from the market, but co-create markets (Mazzucato 2013). The state versus markets—or growth and equity— debate has become somewhat sterile, as both institutions can work collaboratively to address “wicked problems” in society or to realize grand missions that lead to structural change. What we present here is a framework of thinking that places emphasis on clearly defined mission-critical objectives, and whose realization requires a strong, not weak, state that is able to co-create markets and work with a variety of stakeholders in realizing missions. Depending on the mission, such stakeholders may include the private sector, social enterprises, or non-governmental organizations. Without such capacities, it becomes extremely difficult to gain traction toward achieving major developmental outcomes. This explains why it is often said that there are many policies in South Africa, but implementation is weak. Implementation failures are linked to absence of clarity of purpose and capacity deficiencies. Having many goals or policy statements does not in themselves constitute a mission nor does it offer certainty that there are requisite capacities to carry out those objectives. It is, however, not just implementation weakness that needs to be solved, but how the state conceives critical-mission objectives and the means through which these are to be realized, for example, through state-owned enterprises, other specialized institutions of the state, district development model at the local government level, through public–private partnerships structured to realize defined set of outcomes, or through other identified avenue that signified shared mission. For South Africa, an array of institutional weaknesses and governance failures at the municipal, provincial and national levels have undermined the ability of the state to deliver on its developmental mandate. These weaknesses center on the organization of the state, absence of an ethos of accountability and transparency, the skills deficiencies, and ill-defined

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goals in some instances. Corruption has also undermined the effectiveness of the state in delivering on its developmental mandate, as shown in various reports such as the State of Capture Report by the former Public Protector, Thuli Mandonsela in 2016, as well in works by academics captured in the study, The Shadow State (Chipkin and Swilling 2020). As we have noted in the previous section, corruption weakens the institutional foundations of the state and redirects resources meant for socio-economic interventions to serve the interests of a few elite. Wasteful expenditure has also undermined governance at the municipal level. The Auditor General’s report has highlighted the fact that the majority of municipalities are non-compliant with legal and regulatory prescripts precisely due to lack of managerial and technical capabilities, policy misalignment, and encroachment of special party-political interests in state processes. Furthermore, South Africa is battling with governance challenges in most of its State-Owned Entities (SOEs). These entities have suffered from weak articulation of mandates or strategic goals, lack of clarity between their commercial and development roles, poor oversight, and deficiencies in corporate governance. In sum, their mission is blurry and the capacities that are often deployed into these entities are not fit for purpose. It is worth undertaking a short review of the performance of SOEs and various attempts at restructuring, before proposing some of the approaches that could be considered in calibrating SOEs to fulfill critical missions to promote development. The chapter proceeds to discuss this issue below. State Capabilities and State-Owned Enterprises SOEs in South Africa have since 1990s struggled with governance challenges and also battled to define their mandates in precise terms. Many attempts at formulating a framework to guide restructuring have not borne fruit. In some instances, these SOEs have become a burden on the fiscus through state guarantees by the National Treasury which are extended in order to cover their borrowing in capital markets. Restructuring the SOEs for sustainability and to calibrate them to deliver mission-critical developmental mandates is vital for a country like South Africa. Much of the attention on restructuring of SOEs has focused on the governance fixes, especially as a result of corruption, as well as on operational improvements.

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However, there has, by and large, been very limited attention placed on the deep-seated challenges related to the critical missions of these organizations, their alignment to government’s strategic objectives, and their long-term positioning. As such, governance frameworks within these are not properly grounded on any strategic goals that can be measured against government’s mission-critical objectives. The boards and management teams in place, as well as the relationship between the boards and the shareholder, have no guiding compass apart from doing business as usual and adhering to generic governance frameworks. Evaluating success or failure is thus based on very limited metrics of either governance principles or value-for-money (financial sustainability) objectives without much regard for long-term developmental outcomes since there is no tool defined to evaluate these. Restructuring efforts so far have been about reorganizing the house, while leaving the fundamental structure intact and purpose weakly defined. In some sense, this limited focus has been necessitated by imperative of the urgent: to stop corruption, avoid further financial losses, and set in motion a process of internal clean-up of these SOEs. Like the classical “wicked problem,” SOEs are not facing one single challenge, but a multiplicity of problems that are often difficult to define in precise terms. Even political principals who are well-meaning in driving change in these entities may themselves not be well acquainted with corporate governance norms or may choose to disregard these, believing that political overreach to clean up these entities trumps corporate governance and independence of Boards. If they have no strong sense of mission they seek to accomplish, beyond just operational improvements, it is unlikely that they will position these SOEs as instruments for development. There have been in the past various attempts at restructuring SOEs such as the 1999 initiative that culminated into a policy framework An Accelerated Agenda Towards the Restructuring of State-Owned Enterprises in August 2000, which set out a pragmatic approach with various options: further nationalization for strategic reasons; joint ventures between existing SOEs and the private sector; reducing the level of state ownership in order to enhance efficiencies or to empower historically disadvantaged through such a process (Department of Public Enterprises 2000). Another Presidential Review Committee on State-Owned Enterprises published its report in 2013. The main focus of its work was whether SOEs were responsive to the developmental state agenda, and sought to ascertain “the extent to which the state should be an active,

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effective and decisive shareholder” (Presidential Review Committee on State-Owned Enterprises 2012). Further, it also looked at clarifying multiple roles of government such as shareholder, policymaker, regulatory, and operator, and how these worked in practice. The committee made several recommendations. These included its observations that there needs be an enabling environment for SOEs; that government should delineate the separate roles of government as owner, policymaker, regulator, and implementor; adopt a policy for mandatory periodic reviews of SOEs; the executive authority must play a stronger role in setting the strategic direction and framework for SOEs; government to adopt appropriate funding principles and models; government to consolidate SOEs; and that SOEs should play a leading role in socio-economic transformation. These are a set of fixes that do not go deep. Given weak capacities within government, these and other recommendations that would follow as a result of governance and financial challenges in major SOEs such as Eskom, SAA, and SABC could not be carried out. The failings of SOEs in the recent past have led many to questions whether the state should hold onto these, with suggestions that these should be privatized. In our view, the question is not whether state-owned enterprises should exist or not. What is of utmost importance is how their missions are defined and how they operate as constituent parts of a mixed economic system, and where the state has an opportunity to co-create markets and provide the social and economic infrastructure that would otherwise not be supplied by the private sector. Without singling out any of the 700 or so state-owned enterprise, it could very well be that some of these do not have compelling missions to fulfill, but this should not be assumed a priori without proper examination of the fitness of these SOEs for purpose, assessment of their capacities, and clear understanding of the nature of governance challenges that each may be confronted with. It is not a given that SOEs are destined to fail. There are factors that may contribute to their failure, and these could include the management teams that are appointed, the skills set of the Boards, and the set of relationship between the Boards and government as a shareholder. If missions are clearly defined and are periodically evaluated, many of these challenges will not exist to the extent that they are. The Norwegian model offers some instructive examples. In Norway, the shareholding structure of government is diffused across 11 government departments and with state equity ranging between 30 and 100%.

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Apart from the government pension fund of Norway and the well-known Statoil in the gas and oil sector, Norway commands 70 other SOEs that are under the oversight of 11 government ministries spanning aerospace, health sector, local government banking, arts and culture, genetic seed breeding, construction and civil engineering services, coal mining, property development, fiber optics, and mobile telephony, among others. At face value, the state should not be participating in some of these activities. However, it is not the nature of the activity but the mission that is pursued that determines the extent of participation of the state in economic sectors or activities. Many of these SOEs are 100% owned by the state, and this is over and above the shareholding interest that the state has in various private sector companies, a posture that seeks to fulfill a defined set of missions. The activity of the state generates public value that sustains high quality of life that Norwegians enjoy. In some instances, this is about diversifying the economy into new frontiers of technology and to build a knowledgebased society. Debates on the role of state-owned enterprises and the precise terms of their pursuit of commercial vis-à-vis developmental role are ongoing in Norway and elsewhere. China also offers plenty of examples of SOE regulation with varying levels of complexity from local to national oversight bodies. It is the mission that determines how the state participates in the economy. In both China and Norway, the main critical success factors, at least for those SOEs that are performing well, are capabilities, clearly defined missions, and better coordination. In the case of South Africa, there are various fixes that are required as part of thinking about defining mission-critical objectives and imbuing these agencies with requisite capabilities. First, there is a need for clear ownership policy that defines the overall rationale for state ownership, the state role in corporate governance of SOEs, and how the government will implement its ownership policy needs to be in place. Second, there should be constant monitoring and evaluation of these entities, with focus on both the manner of their operations, how they deploy capital, and their development effectiveness. Third, SOEs should justify themselves on the basis of value-creation for the public and with clear development impact. This is not to be read to mean financial sustainability is not important, but this is subordinated to the legitimate social purpose or mission that the state seeks to achieve. There are areas where some SOEs could work in tandem with the private sector in co-creating markets.

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Fourth, at the minimum, these entities should abide by existing corporate governance norms, including Companies Act, Public Finance Management Act, and King IV Codes of Good Governance. For this to be possible, boards should be selected on a merit-based system and made up of individuals known for their tested expertise and grasp of ethics. Finally, as the OECD Guidelines on Corporate Governance of SOEs suggest, these entities should have a disclosure policy that identifies what information should be publicly disclosed, and clear processes on obtaining such information. It is important that various government departments that are responsible for state-owned enterprises improve their coordination. This is especially critical for the Department of Public Enterprises and various policy departments, the Department of Planning, Monitoring and Evaluation, the National Treasury since it is the custodian of state guarantees, and the Presidency for coordination purposes. For this to be possible, there is a need to improve institutional quality and coordination, the subject of the next section. Importance of Institutional Quality and State Capabilities Apart from state-owned enterprises, there are numerous other deficiencies that exist within the bureaucratic structure of governance, and these inhibit implementation of government policies. Their weaknesses have varied sources, some are historical and some have emerged as a result of bad practices, especially the defective party-state relationship, misalignment of objectives, inter-agency contestations, and lack of a clear human capital strategy for the public sector. As we have noted before, corruption has been the Achilles Heel of state institutions. This paper does not set out to offer solutions to all these challenges. Rather, it articulates a broad framework built around long-term capacities, dynamic capabilities, innovation, and developmental focus on specific missions rather than generic trickle-down growth. This organizing framework allows decision-makers to focus on the missions to be achieved. In the first phase of democracy, a period spanning between 1994 and 2007, there was a strong focus on building a democratic developmental state with strong constitutional commitments. The “Ready to Govern” envisaged the state intervening in the economy in a “flexible way,” that “…strengthen[s] the ability of the economy to respond to the massive inequalities in the country, relieve the material hardship of the people, and to stimulate economic growth and competitiveness”. In the early

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stages of ANC rule, its approach continued to favor a strong state model capable of acting in the collective interest while ensuring balance between democratization and considerations of equity and justice. Constitutional values such as human dignity, the achievement of equality, the advancement of human rights and freedom, non-racialism and non-sexism, and constitutional supremacy were articulated in various policy positions of the governing party and institutions of the state, and these mediated state-society relations. Various policies were developed including those that were aimed at fixing economic underperformance that was the legacy of the apartheid state as well as the creation of a new set of institutional arrangements. Reforming the public service was one of the most important of these reforms. There have in the past been various attempts before aimed at improving the functioning of the public service from a human capital development point of view. In 1999 the then minister of public service and administration Geraldine Fraser-Moleketi launched the South African Management Development Institute (SAMDI) with the purpose of improving efficiencies in the public service. Institutional weaknesses did not abate; instead, they increased. The service ethos of Batho Pele (“People First”) did not become deeply ingrained in the culture of public service. In 2004, President Thabo Mbeki launched another initiative in the form of Public Administration Leadership and Management Academy (PALAMA), a predecessor to the current National School of Government. At the unveiling of PALAMA, Mbeki asserted that this new initiative would take government to a “qualitatively higher trajectory” and will be marked by “decisive transition in public management development.” Yet still building a capable state proved an elusive goal. As noted earlier, in 1994 the Reconstruction and Development Programme (RDP) envisioned a public service marked by a welldeveloped human capital, geared toward building the economy, democratizing the state and society, and meeting the basic needs of the majority of South Africans (ANC 1994). These sets of missions were not fully achieved owing to low investment into long-term capacities and weak focus on dynamic learning capabilities within the state. The persistence of apartheid spatial arrangements and high levels of inequality more than 25 years since democracy bears testimony to lack of capacities to shape and implement equity objectives. To a considerable degree, these failures have originated in politically oriented deployments in state

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departments and agencies or what has been referred to as cadre deployment practice in the governing party. In other cases, they have had to do with fragmented structure of government and uneven capacities across the different levels—national, provincial, and local. Coordination problems, politically inspired deployment, and skills deficiencies for implementation of priority developmental programs are all the obstacles that decision-makers still need to overcome. These problems have been present in government and marked by the dissolution of the Policy Unit in the presidency in 2010, which saw loss of skills in a critical policy nerve center of government. The Department of Planning, Monitoring and Evaluation that replaced its role could not rise to the occasion owing to both weak capabilities and lack of authority to coordinate effectively across government. The delivery unit in the name of Operation Vulindlela (Open the Path) Unit led from the National Treasury will face similar challenges if its mission is not clearly defined, is not well-resourced and given latitude to coordinate effectively and both monitor implementation and introduce innovations in ways in which government carries out its mission. Chapter 2 has reflected on some of the modest initiatives that Operation Vulindlela has carried out. Yet resourcing and coordination challenges could be its Achilles Heel. There remains a critical delivery gap at the local government level which is outside of the remit of Operation Vulindlela, and this may undermine the effectiveness of the reforms. We discuss this at great length when looking at local government level later in this chapter. Capacity weaknesses at the local government are much worse as the various Auditor General reports have indicated (we will discuss this in more detail in the next section). Every year, the Auditor General paints a picture of systematic irregularity, wastage, and corruption at the local government, with skills deficiency a mark of how deep the party interferes at this most important sphere of governance. Party-directed cadre deployment is one channel through which the party-state relationship is blurred, and this erodes the capabilities of the state and distorts its mission. The institutional erosion of the state through cadre deployment was confirmed by evidence that over half of municipal managers are not qualified for their positions. Party-directed cadre deployment is contrary to norms of good and effective governance. This defective party-state relationship cripples the effectiveness of state bureaucracy and has the potential of crowding out top skills in government. The bureaucratic core of the state—what

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Nicos Poulantzas refers to as the institutional kernel of the state—constitutes the system and organization of the bureaucracy, and its long-term capacities (Poulantzas 1980). Such long-term capacities include well-trained experts that are key to mechanisms for intelligent policy choices, implementation of the routine (operational) functions, the organizational structures or delivery mechanisms that are used for resource allocation, and protocols governing how different agencies of government interact with one another to deliver social objectives (see also Painter and Pierre 2005). The capacities form the foundations of strong institutions and their dynamic capabilities. Our main contention is that the purpose and ethos of the public sector should be conceived from a new perspective—that of government developing sound institutional long-term capacities that will enable it, among others, to actively shape markets rather than simply fixing failures. It should also reconfigure social structures and systems to pursue outcomes that promote greater inclusion and equity. This brings us to the mediation of competing interests, the interplay between the bureaucracy and key political actors, including business, labor, and the ruling party outside of the state. When this interplay is badly managed or perverted to further narrow interests, for example, when cadre deployment neuters appropriate political oversight, or when the state is captured by special interests for corrupt purposes, the effectiveness of public institutions and the delivery of quality public services suffer. Strong institutions that are capacitated by well-trained bureaucrats who are committed to the ethos of public service and are endowed with mission-critical expertise are key success factors in enabling the state to achieve developmental outcomes. Without a sound normative base and strong capabilities, it is difficult to create economic prosperity. In such an environment strategic planning and good intensions become casualties of institutional underperformance or pursuit of narrow sectoral interests. Tackling grand challenges requires the strengthening of institutional capacities and capabilities of the state across different spheres of government, especially at the coalface of public service delivery at the local level. It also requires revitalizing private and public investment, as well as promoting innovation in a collaborative manner, including through partnerships between government, research institutions, and industry. In the South African context, there are public policy innovations that are underway in the form of social compacting in developing sectoral master plans through government-business collaboration, district

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development model to overcome implementation weaknesses in local government, and a roadmap aimed at improving the performance of stateowned enterprise to enable them to operate more effectively and with a clear developmental purpose. Examples such as the poultry and sugar master plans offer some lessons on structuring state-market relations in to bolster the capacity of the state to deliver social and economic outcomes. These policy processes need to be underpinned with strong conditionalities for business in order to steer the economy and promote productive forces toward a more inclusive, sustainable, and innovative economy. Our approach is not about more state or less state, but a different type of state: one that is characterized by innovative institutions, embodies public value, and is able to act as an investor of first resort, catalyzing new types of growth, and in so doing crowd in private sector investment and innovation—these are in essence functions about expectations and about future growth areas. Weak Institutional Capabilities at the Local Government Level The 1998 White Paper on Local Government outlines the developmental thrust of local government. It also places emphasis on the need for municipal institutions to be capacitated at an appropriate level, including through the adoption of Monitoring & Evaluation (M&E) mechanisms to measure the impact of policies is also emphasized. In addition, it is important to build a system of innovation at the local level rather than have this only located and limited to national centers and with limited diffusion to local government. This is important given that local government is at the coalface of socio-economic challenges, and civil servants at this level are the main drivers of service delivery to communities. A historic assessment of local government indicates a persistent culture of incapacity and failure. In its Diagnostic Back to Basics report, Cogta indicated that only 7% of municipalities were considered to be doing well on implementation, 30% were considered reasonably functional, 32% almost dysfunctional, and 31% completely dysfunctional in 2014 (Cogta 2014). This was as a result of widespread institutional incapacity and skills deficiencies in local government among others. This has, in certain instances, led to a complete breakdown of basic service provision. There is no sign that these problems have been fixed since then. Notwithstanding these findings, not much has been done to arrest the decline in skills at local government or to undertake a process to

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build dynamic capabilities. This partly reflects a vicious cycle of high levels of socio-economic marginalization in some of the local areas, especially in townships and rural areas, lack of system of innovation, and agglomeration of skills in urban nodes that are relatively developed. Building capabilities in the local sphere of government, therefore, remains a serious challenge. The performance of local government continues to deteriorate as exhibited by numerous audits by the Auditor General’s office. For instance, the Auditor General’s findings over the decade have consistently shown a regression in terms of financial management. The local government audit outcomes for the 2014–2015 financial year indicated encouraging signs with a cumulative improvement in the period 2010–2011 to 2014–2015. There was a significant reduction in adverse and disclaimed opinions from over 30% of municipalities to about 11%. This trend was reversed in the 2015–2016 financial year. Regression has continued with the latest audit outcomes for the period 2018–2019 indicating that 76 municipalities have fallen backwards, and only 31 have registered some improvements. This clearly does not need just minor fixes, but major interventions that include redefining missions and thinking through the kind of institutional innovations that are required to bolster municipalities and districts. While the emphasis on the audit outcomes has been a failure of leadership and lack of effective governance, in the 2018–2019 report the Auditor General has cited instances where finance units and internal audit divisions of both district and local municipalities lacked the necessary skills, competencies, and capacity. There is a general practice in municipalities where they rely heavily on consultants to compile their strategic plans and financial statements, and with no skills transfer happening. This will not yield outcomes that generate dynamic capabilities over time. In addition to the Auditor General’s reports, the results from the Department of Planning, Monitoring and Evaluation’s (DPME) State of Management Practices in Municipalities for the financial year 2016/2017 indicated the continued non-compliance of municipalities to regulatory frameworks and service standards. This report was based on a survey undertaken during that period where 41 municipalities were assessed. Of the 41 municipalities, 16 (39%) were found to be non-compliant with best practice requirements in terms of integrated development planning and implementation, 30 (73%) were found to be non-compliant on service standards and compliance management, and seven (14%) were

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non-compliant and 14 (34%) were partially compliant on service delivery (meaning over 50% of the municipalities assessed were not fully compliant with legal, regulatory, and prescribed best practice requirements in service delivery standards). The survey also indicated that 17 municipalities (41%) fully applied the prescribed recruitment practices and were innovative and 20 (48.7%) were also fully compliant but were not innovative in applying those practices. The finding on the application of prescribed recruitment practices suggests that wrong kind of professionals are employed in many municipalities and these probably lack the requisite skills to execute their functions. Targeted interventions are required at the municipal level if social and economic infrastructure is to be delivered and to generate quality of life outcomes for local communities. Remedies lie, at the broader level, with properly defined missions, embedding innovation principles and practices, allocating the right set of skills and technical capacities, and improving systems of accountability, especially between the national sphere and local government. Key among these is mission clarity and proper signaling through use of incentives or sticks by the national government. In addition, there is also a need for better alignment between strategic goals or policy directives and the kinds of skills that are deployed; better systems of building capacities among municipalities; and coordination of certain missions through collaborative relationship between government, business, social enterprises, and community-based organizations to improve service delivery at the local government level. Furthermore, strong monitoring and evaluation (M&E) tools that are well-designed to support agreed-upon missions could go a long way in identifying implementation gaps early on. These should not only provide framework for immediate policy fixes but should also be linked to long-term missions and help decision-makers to anticipate the direction of change. All of this will require a new set of knowledge resources that could help the state to “envision and enact bold policies” (Mazzucato 2013). The process that was initiated by COGTA in the wake of the President’s announcement on the District Development Model will need to focus on building capabilities and realizing more innovative approaches to governing in a decentralized fashion with strong coordination at the top rather than merely fixing problems. We consider options for this in the next section that looks at the District Development Model.

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Using the District Development Model to Promote Public–Private Partnerships The President’s Coordinating Council (PCC) endorsed district coordination delivery model for development under the name Khawuleza, which loosely translated means walk or act faster (Presidency 2019). The District Development Model was announced during the Presidency’s 2019 Budget Vote and was aimed at overcoming historic underperformance, eliminating silos in the way government operates, and improving coherence in government. One of the objectives of this new approach is to foster partnerships between national, provincial, and local spheres of government and communities, as well as business and labor to synchronize and implement economic plans in South Africa’s 44 municipal districts and 8 Metros. This model seeks to improve the effectiveness of development programs by emphasizing coordination, complementarities between rural and urban development and ensuring alignment of budgets. By bringing the three spheres of government—local, provincial, and national—to work more collaboratively (‘joined up government’) in coordinating resources and addressing public service delivery weaknesses, this new approach could potentially improve government performance. The model reframes the geographic spaces by identifying them as locality—transcending both the existing municipal and district municipal structures—as means to aggregate capabilities and to create impact. Government envisages that the DDM will provide regulatory and policy certainty to local stakeholders—positioning Districts as viable and attractive places to live, work and invest. Under this approach, all planning and budgeting across the state will be based on a shared understanding of the kind of deficiencies that are experienced at the District level. A pilot of the District Development Model was launched in two districts (OR Tambo and Waterberg) and one metropolitan (Ethekwini) municipality. Accordingly, national budgets from 2020/2021 will be spatially based on this new thinking. The DDM envisages these 44 districts as “developmental zones” built around strategic alignment across all three spheres of government (national, provincial, and local) to guide strategic investments and projects at identified localities. There are, however, limitations with the District Development Model. This approach was created primarily to solve coordination challenges within government structures. The main inhibitors to performance are fundamentally systemic and encompass those problems we have previously

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alluded to, namely weak sense of mission, conflation of party and state authority in the deployment of critical skills and driving change, dearth of managerial and other technical expertise, lack of a framework to promote innovation at local government level, absence of integrated thinking that views the state as a coordinating mechanism that works collaboratively with an array of actors outside the state, including the private sector, social enterprises, and community-based organizations. This is not to suggest that an alternative framework to the existing District Development Model should be invented; rather, the scope of its focus needs to be broadened in order to tackle the more deep-rooted problems rather than making small fixes around coordination. The capacity of the state will need to be bolstered in order to engage more effectively with the private sector and the range of other non-state actors so that mission-critical outcomes can be based on legitimate social purpose and broader acceptance by various stakeholders. It is not just bureaucratic capabilities that are missing, but leadership at the top and that includes at the level of Directors-General, Heads of Departments in Provinces, Municipal Managers, and political leadership across different spheres of government. The announcement by the South African Cabinet on 26 August 2020 of an initiative driven by the National School of Government jointly with the University of the Witwatersrand and O. R. Tambo School of Leadership to roll out training programs for the political layer could be a starting point, but certainly not enough to address the deep-seated leadership challenges in government. The current District Development Model does not go beyond aggregating various institutions that individually suffer from the same weaknesses that the state seeks to solve through coordination. It also does not aim to do the things that were not done before or even envisioned (Mazzucato 2013). There is lack of “big thinking” or “moonshot” perspective. While coordination is important, solutions have to be multidimensional and cross-sectoral (Mazzucato 2017). This is especially so given the complexity of governance and socio-economic challenges in many of the poor municipalities in South Africa, especially those that are on the margins of the urban areas. Coordination, as proposed in the District Development Model approach, does not address many of the systemic challenges we have highlighted. However, the District Development Model remains an important approach for initiating thinking through large-scale change that, for

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example, could entail redefining the spatial arrangement; taking a moonshot on economic infrastructure expansion including digital infrastructure in underserviced townships and rural areas, as well as to close the ruralurban divide; building a thriving and multi-sectoral rural economy that is not conceived as a “ghetto economy” but integrated into the mainstream economy through value chain integration of small enterprises; rethinking system of innovation at the District level; and crowding in technical capacities that are required to improve public administration, especially in relatively poorer municipalities. In sum, there is a need to have a clear vision on utilizing the District Development Model as an instrument that is more than just fixing coordination problems or solving immediate financial challenges but as a powerful bases to achieve moonshots in areas where the state has failed in the past. This will require communicating a shared vision, agreeing spatial and development priorities in identified impact areas, bolstering the effectiveness of municipalities as delivery agents, sound long-term planning, and accountability framework and responsibilities including tracking and reporting on implementation and actions. Apart from the imperative of alignment and joint planning, there is a need to define clear mission-critical objectives that do not simply reconfigure the locality of engagement but aim to shift the composition of intended outcomes— for example, to promote economic inclusion—and how these are to be achieved. Private sector expertise could be leveraged to provide technical support to local government while also transferring skills. Engaging with the private sector and other key agents in society should go beyond just fixing weaknesses in the state to fixing structural challenges in local communities, for example, working together to overcome under-investment in digital infrastructure or green energy—as well as other crucial infrastructure pillars—in rural and township communities. This would need to have a sound governance framework in place which should set out a structure of reciprocity that is mutually beneficial. Given the pervasiveness of “wicked problems” in many municipalities, this is an area where grand cross-sectoral coordination for mission delivery—rather than just alignment within government—is required to create significant momentum for structural change.

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Digital Transformation as Mission-Critical Outcome South Africa still faces challenges in transitioning to the kind of digital economy that facilitates inclusiveness. There remain major policy, regulatory, and human capital bottlenecks that hinder meaningful participation of a large number of citizens in the digital economy. There are many deficiencies that need to be overcome in the ICT and digital policy environment. These have been set out in greater detail in the Draft Digital Futures Report by the National Planning Commission (2020). The diagnosis of the National Planning Commission confirms our observation of the developmental cost of weak state capabilities and the need to build dynamic capabilities in state institutions. The deficiencies highlighted in the report include policy and regulatory weaknesses, overlapping agencies, delays in implementation of key policy decisions especially to further the role of ICT in socio-economic development, delays in undertaking digital migration, weak appointments to key institutions, and market failures in the form of high data cost. The area of market failure, data cost, flagged by Competition authorities throttles access to ICT and digital tools for citizens in low-income brackets. In 2019, the South African Competition Commission found that South Africa’s mobile network operators charged consumers excessive data prices. The enquiry undertaken by competition authorities into data costs revealed evidence of monopolistic behavior. The report found that South Africans paid higher prices compared to other countries, including other African countries. Lower income consumers, in particular, were found to be “exploited to a far greater degree relative to wealthier consumers for mobile data prices” (Competition Commission 2019). Slow progress on the part of government in releasing high demand spectrum due to delays in digital migration—from analog to digital—has left mobile operators with both insufficient spectrum and a lack of access to favorable low frequency bands, and this potentially has a cost raising effect for consumers. It also hinders availability of low frequency spectrum for rural areas that are under-served, and where new sources of innovation could be uncovered especially to promote smart agriculture and enable data-driven solutions in delivering social services such as education and health care. As the Digital Futures report points out, the key enabling infrastructure in the form of digital infrastructure and service (base stations, data warehouses, and cloud providers) depend on high-quality, stable power

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supplies, and transportation system. This is extremely important for those areas that are blighted by the digital divide, especially rural communities and township economies. Without clearly defined missions, an integrated planning approach, embedding a system of innovation, building requisite skills and technical capabilities in government, the digital infrastructure will remain weak, with poor communities excluded from the digital economy. With sufficient public investment in expanding the digital infrastructure and related skills, various more opportunities could be created in these areas. This could be an important mission-critical outcome for District Development Model that we discussed earlier. South Africa lacks sufficient skills for the digital economy. In 2017, South Africa had internet usage of more than 54%, with smartphone penetration rates at over 80%. The usage rate is below the profile of an aspirational middle-income country like South Africa that is an economic giant in sub-Saharan Africa. Of greater importance is the value that the digital economy could generate for the country’s socio-economic development. Government will need to direct its efforts toward narrowing the socio-economic divide that are also starkly reflected in the digital divide, especially between well-off suburbia and poor townships; and between the urban centers and rural areas. Co-investing in building digital infrastructure in under-served areas and releasing the much awaited for spectrum are as important for development as they are for commercial utility. In addition, greater consolidation of state-owned enterprises in the ICT area and defining their missions, the viability of an open access wireless network and enhancement of public sector connectivity are some of the action points underlined in the Digital Futures report that may need to be accelerated. There are other innovative solutions that can be explored to accelerate a shift to the digital economy in particular for rural communities that are under-served and that are investment starved. Smith (2019, 159) observes: “If it’s possible to shift from fibre-optic cables to wireless technology for broadband, we can even spread broadband coverage farther and faster and at a lower cost…around the world.” Spreading wireless technology to enlarge internet coverage is possible through utilization of low frequency band that is made abundantly available through digital migration. Elsewhere TV white spaces that are vacant channels in the TV band are rechanneled through database technology, antennae, and endpoint devices through to single fiber-optic cable to diffuse wireless signals to under-served areas, including farms in rural communities. These TV

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white spaces have been put to great use in rural parts of Kenya that even lacked electricity in ways that improved education outcomes and created new job opportunities in rural communities. This approach has a costreduction effect compared to using fiber optics that require significant capital outlay upfront. These are small-bet innovations that could in future stimulate more waves of innovation in township economies and rural parts of the country. Failure to make the necessary investment in digital infrastructure in under-served areas could reproduce the socio-economic divides and spatial arrangements that mirror the apartheid social system. Achieving all of this requires clearly defined missions, building dynamic capabilities within the state, working with an array of stakeholders to realize the defined missions.

Conclusions and Recommendations One of the biggest lessons of the COVID-19 pandemic is that public sector capacity to manage a crisis of this proportion is dependent on the cumulative investments that a state has made on its ability to govern, do and manage. While the crisis is serious for all, it is especially a challenge for countries that have ignored those needed investments in public sector capacities. The latter is typically defined as the set of skills, capabilities, and resources necessary to perform policy functions, from the provision of public services to policy design and implementation. During the past half a century, many countries have seen their public sector capacities hollowed out by swathe of reforms driven by market failure and marketfixing logics. This has been accompanied by narrowing down of the policy space by international policy rules based on the so-called Washington Consensus and by globalization of production value chains. In the pre-COVID-19 world, governments were increasingly turning their attention to how to tackle “grand challenges” or “wicked issues” such as climate change, demographic challenges, and the promotion of health and well-being. Behind such “normative turn” in economic policies lie the difficulties of generating sustainable and inclusive growth, and recognizing that limited market-fixing capacity frameworks and narrow policy spaces are diminishing social, environmental, and economic resilience of societies. Policymakers increasingly dedicated their attentions to not only the rate of economic growth, but also its direction. For South Africa, an array

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of institutional weaknesses and governance failures at the municipal and national levels have undermined the ability of the state to deliver on its developmental mandate. The majority of municipalities are deemed noncompliant with legal and regulatory prescripts precisely due to lack of managerial and technical capabilities, policy misalignment, and encroachment of special party-political interests in state processes. Furthermore, South Africa contends with governance challenges in most of its StateOwned Entities (SOEs). These entities have suffered from confusion over their precise mandates, lack of clarity between their commercial and development role, weak oversight, and corporate governance. Tackling grand challenges requires strengthening institutional capabilities of the state across different spheres of government, especially at the coalface of public service delivery at the local level. There are already important initiatives in place such as Operation Khawuleza that need to be boosted with capacities and authority to drive implementation, something that has suffered since the closure of the Presidency’s Policy Unit in 2010. Currently, this operation is located within the National Treasury and may have difficulties in extending its authority across government. Further there is a need to rethink the relationship between this and the Department of Planning, Monitoring and Evaluation (DPME), on the one hand, and the structures that have a function of monitoring and evaluation and policy implementation and the rest of government, on the other hand. It is important that agencies that are tasked with implementation are given sufficient political authority and administrative authority. These will also need to coordinate the various policy advisory work conducted by various councils and channel recommendations toward implementation, with monitoring and evaluation tools in place. Further, there are public policy innovations that are underway in the form of social compacting in developing sectoral master plans through government-business collaboration, district development model to overcome implementation weaknesses in local government, and policy at improving the performance of state-owned enterprise to enable them to operate more effectively and with a clear developmental purpose. Conditionalities should underpin these processes, especially to shape the behavior of business to steer their actions toward promoting greater investment, innovation, and equity. In this paper, we have taken a closer look at the institutional fixes, among others, and made a point that there is a need to broaden the horizon of public policy innovation to deliver effective developmental

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outcomes. Our approach is not about more state or less state, but a different type of state: one that is characterized by innovative institutions, embodies public value, and is able to act as an investor of first resort, catalyzing new types of growth, and in so doing crowd in private sector investment and innovation—these are in essence functions about expectations and about future growth areas. The emphasis is on building collaboration between state and business, as well as about picking the willing than picking winners. The public sector bears responsibility for the long-term resilience and stability of societies, and for shaping public outcomes through policymaking and public institutions. In order to tackle the grand challenges, governments need capacities for both long-term strategic agenda as well as short-term agile responses. Moreover, we proposed that the state need to: • be bold and address societal value; • have concrete targets: you know when you get there! • involve research and innovation: technological readiness over limited time frame; • be cross-sectoral, cross-actor, and cross-disciplinary; • involve multiple competing solutions and bottom-up experimentation. The pandemic and its aftermath offer an opportunity to rethink the foundation of public sector capacity and to align them with the needs of the twenty-first century, and especially to address long-standing developmental challenges in South Africa.

References African National Congress. 1994. Reconstruction and development programme. Johannesburg: Umanyano Publications. Chipkin, Ivor, and Mark Swilling. 2020. Shadow state. Johannesburg: Wits University Press. Cogta. 2014. Back to basics. http://www.cogta.gov.za/cgta_2016/wp-content/ uploads/2016/06/The-Back-to-Basics-Approach-Concept-Document.pdf. Competition Commission. 2019. Data market services inquiry. https://www. compcom.co.za/wpcontent/uploads/2019/12/DSMI-Non-ConfidentialReport-002.pdf

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Department of Public Enterprises. 2000. An accelerated agenda towards the restructuring of state owned enterprises—policy framework. Drechsler, Wolfgang. 2005. The rise and demise of the new public management. Post-Autistic Economics Review 33 (14): 17–28. Drechsler, Wolfgang, and Rainer Kattel. 2020. Debate: The developed civil servant—Providing agility and stability at the same time. Public Money & Management, 1–2. https://doi.org/10.1080/09540962.2020.1729522. April 20, 2020. Evans, Peter. 1995. Embedded autonomy. Princeton: Princeton University Press. https://press.princeton.edu/books/paperback/9780691037363/emb edded-autonomy. June 20, 2020. Hofstatter, Stephan. 2018. Licence to loot. Cape Town: Penguin. Hood, Christopher. 1991. A public management for all seasons? Public Administration 69(1): 3–19. https://doi.org/10.1111/j.1467-9299.1991. tb00779.x. April 20, 2020. Jonas, Mcebisi. 2019. After dawn: Hope after state capture. Johannesburg: Picador Africa. Lapuente, Victor, and Steven Van de Walle. 2020. The effects of new public management on the quality of public services. Governance n/a(n/a). https:// doi.org/10.1111/gove.12502. June 20, 2020. Lazonick, William, and Mariana Mazzucato. 2013. The risk-reward nexus in the innovation-inequality relationship: Who takes the risks? Who gets the rewards? Industrial and Corporate Change 22(4): 1093–1128. https://academic.oup. com/icc/article/22/4/1093/753299. June 14, 2020. Mashele, Prince and Mzukisi Qobo. 2014. The fall of the ANC: What next? Johannesburg: Pan Macmillan. Mazzucato, Mariana. 2013. The entrepreneurial state: Debunking public vs. private sector myths, 1st ed. London and New York: Anthem Press. Mazzucato, Mariana. 2016. From market fixing to market-creating: A new framework for innovation policy. Industry and Innovation 23(2): 140–156. https://doi.org/10.1080/13662716.2016.1146124. June 20, 2020. Mazzucato, Mariana. 2017. Mission-oriented innovation policy: Challenges and opportunities. UCL Institute for Innovation and Public Purpose. https:// www.ucl.ac.uk/bartlett/public-purpose/publications/2017/sep/mission-ori ented-innovation-policy-challenges-and-opportunities. June 20, 2020. Mazzucato, Mariana. 2018a. Mission-oriented research & innovation in the European Union : A problem-solving approach to fuel innovationled growth. http://op.europa.eu/en/publication-detail/-/publication/5b2 811d1-16be-11e8-9253-01aa75ed71a1/language-en. June 20, 2020. Mazzucato, Mariana. 2018b. The value of everything: Making and taking in the global economy, 1st ed. London, UK: Allen Lane.

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Mazzucato, Mariana, and Rainer Kattel. 2020. COVID-19 and public sector capacity. Oxford Review of Economic Policy. Mazzucato, Mariana, Rainer Kattel, and Josh Ryan-Collins. 2020. Challengedriven innovation policy: Towards a new policy toolkit. Journal of Industry, Competition and Trade 20(2): 421–437. https://doi.org/10.1007/s10842019-00329-w. June 14, 2020. Mazzucato, Mariana, and Carlota Perez. 2014. Innovation as growth policy: The challenge for Europe. SPRU—Science policy research unit, University of Sussex Business School. SPRU Working Paper Series. https://econpapers. repec.org/paper/srussewps/2014-13.htm. June 20, 2020. Mazzucato, Mariana, and Josh Ryan-Collins. 2019. Putting value creation back into ‘public value’: From market-fixing to market-shaping. https://www. ucl.ac.uk/bartlett/public-purpose/publications/2019/jun/putting-value-cre ation-back-public-value-market-fixing-market-shaping. June 20, 2020. Moore, M. H. 1995. Creating public value: Strategic management in government. Harvard University Press. Painter, Martin, and Jon Pierre. 2005. Unpacking policy capacity: Issues and themes. In Challenges to state policy capacity: Global trends and comparative perspectives, ed. Martin Painter and Jon Pierre, 1–18. London: Palgrave Macmillan UK. https://doi.org/10.1057/9780230524194_1. Poulantzas, Nicos. 1980. State, power, socialism. London: Verso. Presidential Review Committee on State-Owned Entities. 2012. Report of the Presidential Review Committee (PRC) of state-owned entities (SOEs)—Volume 1: Executive summary of the final report. https://www.gov.za/sites/default/ files/gcis_document/201409/presreview.pdf Presidency. 2019. Opening remarks at the president’s coordinating council. 19 August 2020. https://www.gov.za/speeches/opening-remarks-presidentcyril-ramaphosa-meeting-president%E2%80%99s-coordinating-council-pcc? gclid=Cj0KCQiA48j9BRC-ARIsAMQu3WR7Fh_InFf-pB86vKvdBCaTFZD 7i9W_WQSUPNMhuKs92W8GAwutAIUaAvcoEALw_wcB. RDP. 1994. Johannesburg: Umanyano Publications. Rodrik, Dani. 2006. Goodbye Washington consensus, Hello Washington confusion? A review of the World Bank’s economic growth in the 1990s: Learning from a decade of reform. Journal of Economic Literature XLIV: 973–987. Sachs, Jeffrey D. et al. 2019. Six transformations to achieve the sustainable development goals. Nature Sustainability 2(9): 805–814. https://www.nat ure.com/articles/s41893-019-0352-9. September 8, 2020. Smith, Brad. 2019. Tools and Weapons: The Promise and the Peril of the Digital Age. New York: Hodder & Stoughton. Teece, David and Gary Pisano. 1994. The Dynamic Capabilities of Firms: An Introduction, Industrial and Corporate Change 3(3): 537–556. https://doi. org/10.1093/icc/3.3.537-a

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CHAPTER 4

COVID-19 and Beyond: Rethinking Industrial and Competition Policy Nishal Robb and Thando Vilakazi

Introduction Since the end of formal apartheid in 1994, progress in changing entrenched patterns of economic participation, improving low levels of productive investment, and stimulating dynamism and diversification in the South African economy has been limited. In essence, the structural transformation of the South African economy—the key growth-enhancing process of shifting capital and labor toward higher productivity activities and acquiring more sophisticated productive capabilities (McMillian and Headey 2014; Nissanke 2019)—has stalled, with a number of studies suggesting that the country is in a process of “premature deindustrialisation” (Rodrik 2006; Andreoni and Tregenna 2018).

N. Robb (B) · T. Vilakazi Centre for Competition, Regulation and Economic Development (CCRED), University of Johannesburg, Johannesburg, South Africa e-mail: [email protected] T. Vilakazi e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_4

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The above concerns, alongside the scale and persistence of economic exclusion in South Africa—embodied most clearly in growing inequality and deepening unemployment—suggest the need for a rethinking of a number of areas of economic and social policy. The effects of the COVID19 pandemic and associated lockdowns on economies worldwide, the disruption of global supply chains, and the erosion of productive capabilities key among these, provide a powerful stimulus for a rethinking of the roles of and relation between industrial policy and competition policy in particular. These policy areas can act as powerful tools in supporting new entrants and stimulating competitive rivalry in traditionally concentrated economic sectors, and for building capacity for dynamism, innovation, and resilience in the economy generally. In the South African context, however, industrial and competition policies have for the most part been considered separately rather than as complementary. We argue that this approach has been counterproductive. Closer coordination between the two would be mutually reinforcing in a number of important ways, and such a realignment would strengthen the state’s capacity to better manage economic rents in a development-enhancing manner. To a significant extent, large firms in a range of important industries have maintained market power and access to rents through barriers to entry, abuse of dominance, and political influence, rather than through investment, innovation, and dynamism. These dynamics have had the effect of constraining growth in general and downstream manufacturing in particular, in some cases leading to the loss of entire areas of industrial capabilities (Zalk 2017; Mondliwa and Roberts 2019). Reshaping the economy and rewriting its rules such that firms are incentivized to invest and innovate, rather than being rewarded for incumbency and rent-seeking, will require an ambitious industrial policy strategy in which competition policy has an important supporting role to play. In making these arguments, we draw on Klaaren et al.’s (2020) case for a “competition policy” beyond competition law in South Africa, and argue that a more expansive approach to competition policy ought to be developed in close coordination with a more targeted, sector- and industry-level approach to industrial policy. This aspect of the work reflects on the main aspects of the history and outcomes of industrial policy and competition laws in South Africa post-1994, draws lessons from the literature on successful late industrialization, and considers a

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number of new challenges that developing countries face in their efforts to drive structural transformation of their economies. We proceed in Sect. 4.2 to set out key aspects of the economic performance of the South African economy post-1994, with a focus on the lack of structural transformation and symptoms of premature deindustrialization. Sections 4.3 and 4.4 provide critical overviews of industrial and competition policy experiences in South Africa respectively, with Sect. 4.4 also making the case for a realignment and integration between the two. Section 4.5 provides a discussion of a number of cross-cutting themes, opportunities, and challenges raised by our arguments, including the importance of (re)building state capacity, and Sect. 4.6 concludes. The wrong kind of structural transformation and the importance of manufacturing. The South African economy has substantially underperformed in the past two decades in terms of growth, investment, and job creation. The macro-economic dimensions of this are covered extensively in Chapter 5, which discusses the relationship between monetary and fiscal policy in delivering instruments that could support growth and job creation. Critically, the economy has not been able to diversify from core minerals and mining related activities and has not achieved extensive structural transformation, i.e., the transition from low to high value-adding activities over time (McMillan and Rodrik 2011; Bell et al. 2018). We begin by setting out the context in terms of the performance of the economy on key parameters. First, despite consistently strong profitability across sectors (Bosiu et al. 2017), domestic investment remains low relative to other upper-middleincome developing countries. Chronically low domestic fixed investment has been repeatedly identified as a major source of weakness, both for the industrial base and the economy more generally (Rodrik 2006, p. 28; Bell et al. 2018). Second, important structural changes in the economy have taken place over the last 25–30 years. Manufacturing as a sector has been a major casualty of this process, with the finance, insurance, and real estate (FIRE) industries the clear winner. There is a significant correlation between levels of investment and the fortunes of manufacturing industries; Rodrik (2006) illustrates that manufacturing employment as a share of the labor force peaked and has fallen in step with levels of domestic fixed investment. Around 1976–1977, this figure was almost 15%, dropping below

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8% by the late 1990s and reaching 7.3%1 in 2020 (Rodrik 2006, p. 31; Statistics South Africa 2020). The relative decline of manufacturing is a symptom of “premature deindustrialisation,” a worrying developing in light of the role played by the sector in driving sustained growth in developing countries (Rodrik 2006; Andreoni and Tregenna 2018). The provision of relatively wellpaid jobs, the manufacture of exports that generate foreign currency earnings, and the improvement of productive capabilities and strong backward and forward linkages in the local production system are a few important themes in this regard. Rodrik (2006), using 2004 data for South Africa, shows that manufacturing contributes significantly higher value added per employee than services. Bell et al. (2018) show that jobs in manufacturing have consistently paid higher real wages and achieved higher labor productivity throughout the post-apartheid era. For these reasons, a robust manufacturing sector is a key element of structural transformation. Third, the profile of South African manufacturing reflects failures of diversification, innovation, and upgrading of capabilities, and may be vulnerable to further deterioration (Andreoni and Tregenna 2018). Bell et al. (2018), analyzing the value-added performance of manufacturing sub-sectors post-1994, indicate that upstream, resource-based industries have outperformed those that rely on more sophisticated capabilities, indicating failures of diversification and capabilities upgrading in the post-apartheid period. Additionally, where domestic linkages between upstream, resource-based manufacturers and downstream sub-sectors exist, dominant upstream firms have tended to capture the lion’s share of value, squeezing profits and further dampening growth (and even viability in some cases) in downstream industry. Mondliwa and Roberts’ (2019) and das Nair et al.’s (2014) analyses of Sasol provide an especially clear example of how the structure of the South African economy and the failure of the state to intervene more decisively and effectively have combined to undermine stronger diversification, growth in value-added and capabilities development. Lastly, South Africa’s export profile provides an additional indicator of failures to upgrade and diversify the industrial base. Minerals and other resource-based industries continue to dominate the export basket, while

1 Although this is likely to reflect the pre-COVID-19 scenario.

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manufacturing exports indicate an increased share of foreign value added (implying import penetration in intermediate inputs) and a failure to expand and diversify existing export capabilities via the development of linkages in the local production system (Bell et al. 2018). It is important to note that low levels of investment, premature deindustrialization, poor performance in manufacturing, and a range of other undesirable results have materialized in spite of the South African government’s commitment to an orthodox economic policy framework, including “cautious fiscal and monetary policies,” inflation targeting, trade and capital account liberalization, central bank independence, and resistance to large-scale redistribution (Rodrik 2006).2 Rodrik put it as follows: “If the world were fair, political restraint and economic rectitude of this magnitude would have produced a booming South African economy operating at or near full employment” (2006, pp. 2–3). The understanding of South Africa’s industrial base that readers carry into the discussion that follows must therefore be one of sustained decline, stagnation, and vulnerability (even prior to COVID-19), and of the need to remedy this situation urgently. While the achievements of key redistributive and poverty-reducing measures ought to be acknowledged,3 the state has failed to drive structural transformation, the critical driver of inclusive and sustained economic growth for developing countries. Indeed, the evidence presented above suggests that the structural changes that have taken place have been overwhelming negative. Structural transformation in the positive sense, revival of the manufacturing sector, and the successful creation of decent jobs ought to be viewed as urgent priorities if the state is to deliver on the promises and generate the opportunities that underwrite the post-apartheid social compact.

Industrial Policy---Principles, Experiences, and Outstanding Issues Salazar-Xirinachs et al.’s joint UNCTAD-ILO report on industrial policy opens with a useful summation of the challenges facing emerging markets 2 Ndikumana et al.’s (2020) note that a key argument for capital account liberalization was that it would yield a “democratic dividend” in the form of increased private investment, both domestic and foreign (pp. 22–23). It is clear from Fig. 1 that this has turned out not to be the case. 3 See Ndikumana et al. (2020, p. 79) for a short discussion on this topic.

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and developing economies (EMDEs) like South Africa as they seek to achieve job creation, poverty reduction, and meaningful participation in the world economy through structural transformation (2014, p. 1): The process of structural transformation remains particularly challenging for developing and emerging economies. Their efforts to upgrade and diversify take place in an interdependent world economy where earlier industrializers have already accumulated both enabling capabilities (individual and enterprise level know-how and skills, along with collective knowledge and sources of creativity) and productive capacities (embodied in production factors and physical and technological infrastructure) that give their producers significant cost and productivity advantages and equip them to push out the technological frontier through research and innovation.

The role of industrial policy in EMDEs is to navigate these challenges and drive structural transformation through policies that promote the upgrading of productive capabilities, transform the productive structure of the economy, build and strengthen linkages in the local production system and facilitate progress toward higher productivity activities and the production of more complex products (Wade 2015; Bell et al. 2018). Andreoni and Tregenna (2018) provide a helpful framework for organizing the industrial policy instruments most relevant for the challenges faced by middle-income countries as they seek to promote structural transformation and prevent premature deindustrialization, which reproduce in part in Table 4.1. They propose five key policy areas: 1. Production, technological, and organizational capabilities building; 2. Innovation and technological change; 3. GVC integration, local production system (LPS) development, and industrial restructuring; 4. Demand and trade; and 5. Industrial finance. Policy instruments in areas 1 and 2 include the establishment of “intermediate institutions” to help firms build new and competitive capabilities, state assistance in financing of research and development (R&D), and joint ventures between the state, universities, and firms in regard to fostering innovation and the development of new technologies to apply in production. Andreoni and Tregenna highlight the roles played by state institutions such as Embrapas in Brazil and Innofund in China as examples of successful interventions in these industrial policy areas. Embrapas, operating “at the interface between agriculture, biotechnologies and advanced manufacturing,” plays a major role in coordinating

Demand and trade

GVC integration, LPS development, and industrial restructuring

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1.1 Skills policy (TVET) 1.2 R&D intermediate institutions and extension services 1.3/2.1 Matching grants for investments 2.2 PPP research consortia with universities 2.3 Joint ventures with TNC 3.1 Mergers and acquisition and recession cartels 3.2 Competition policy 3.3 FDI incentives 3.4 Local content policy 3.5 SMEs incentives 3.6 Cluster policy 3.7/4.1 Special Economic Zones/Export Promotion Zones 4.2 External demand: Trade policy and regional value chains

Production, technological, and organizational capabilities building

Innovation and technological change

Policy instruments

Industrial policy instruments

Areas

Table 4.1

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Source Adapted from Andreoni and Tregenna (2018)

Industrial finance

Areas

Table 4.1

4.3 External demand: Export cartels 4.4 Internal demand: Public procurement 4.5/5.1 Export oriented: Export finance services 5.2 Long term: Development banks 5.3 Small size: Hybrid/blended finance, grants, procurement 5.4 Public investment policy

Policy instruments

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research, training, investment, and innovation across different sectors, facilitating the development of strong linkages and processes of “intersectoral learning” (2018, p. 31). Innofund’s role has been to finance and coordinate the growth of small-medium technology-based enterprises in China, providing targeted support at different stages of firms’ development. Importantly, Innofund applies strict eligibility criteria in allocating its resources and capacities; firms must comply with national industrial policies, have shown a minimum level of R&D investment in relation to turnover, and meet a range of other performance criteria. Area 3 of Andreoni and Tregenna’s framework comprises industrial policy instruments aimed at GVC integration, local production system (LPS) development, and industrial restructuring. The instruments in this area include competition policy, FDI incentives, local content policies, and Special Economic Zones (SEZs), among others. Area 4 in Andreoni and Tregenna’s framework comprises industrial policy instruments related to demand and trade, i.e., internal and external demand. In relation to internal demand, the National Treasury has highlighted the need for industrial policy to prioritize demand-side measures, procurement policy key among these, in support of industrialization (2019, p. 59). This is a welcome development in light of “supply-side bias” and overemphasis on purely “functional” (i.e., non-selective and non-targeted) measures that have characterized much of the discourse on industrial policy, including in South Africa, where until 2007 the scope of industrial policy was relatively restricted (Chang and Andreoni 2020; Zalk 2014). In relation to area 5, industrial finance, effective allocation, and management of state support for private enterprises—including the possible withdrawal of such support and associated rents—has played a critical role in late industrialization. The provision of industrial finance, typically in the form of long-term financing on concessional terms, has been a key policy lever for many successful late industrializers, used to promote specific industries according to strategic national plans and to discipline firms that fail to perform or refuse to comply with these national plans. Andreoni and Tregenna’s (2018) case studies of a number of key examples showing the importance of the industrial finance component of industrial policy in Brazil, China, and Malaysia, make clear how pivotal a role strategic and well-coordinated industrial finance can play in developing countries. These examples indicate that industrial financing ought to be large in scale, long-term (or “patient”) in outlook, concessional

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relative to commercial financing, tailored to specific sectoral needs and dynamics, guided by a diversification strategy, and targeted at upgrading technological, innovation, and other high value-adding capabilities (Goga et al. 2019; Vilakazi et al. 2020). In the South African context, considerable scope exists to improve the effectiveness of existing development and industrial finance institutions—the IDC, DBSA, and PIC pivotal among these—in regard to their mandates, financing models, governance, conditionalities, and patterns and terms of lending (Goga et al. 2019). As noted by Cramer et al. (2020, p. 77), it is not enough for late industrializers to target a generically higher level of investment; the nature of the activities invested in is critical. There is therefore a key role for the state in directing credit and “crowding in” investment to sectors and industries with high potential for employment, export earnings, and capabilities upgrading. Competing visions of industrial policy: The South African experience and the role of the state In line with the commitment to a relatively conservative economic policy framework described previously, a narrow vision and scope characterized the critical first decade or so of South African industrial policy post-1994, with a skewed focus on some areas such as the automotive sector. In the context of the neoliberal turn and the collapse of the USSR, “‘industrial policy’ became a phrase that one did not utter in polite company” (Chang and Andreoni 2020, p. 324). From this perspective, the second-best type of industrial policy was one in which the state’s role was highly constrained. Thus, throughout the critical period of trade liberalization and up until 2007, industrial policy in South Africa was limited to “functional,” non-selective policies aimed at improvements in market conditions at a general level (Zalk 2014). This helps at least partially to explain why South African manufacturing contracted so significantly in the process of trade liberalization, and without sufficient gains in employment or otherwise elsewhere in the economy (Roberts 2007). Critical labor-intensive industries, clothing, and textiles the obvious example, were all but decimated in this process. These clearly required a more gradual exposure to international competition, as well as targeted support to retain market share and achieve higher productivity in the context of a vicious “race to the bottom” based on the lowest wages and the poorest conditions. In his 1998 critique of newly democratic South Africa’s approach to industrial policy, Ha-Joon Chang had warned that an approach limited to non-selective and purely supply-side measures

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would be likely to further entrench the economic dominance of highly concentrated, capital-intensive, and resource-based industries. Despite the officially non-selective industrial policy approach to which South Africa had been committed, these upstream sectors benefited from a great deal of direct and indirect state support throughout the post-apartheid period, in what Kaplan (2007) referred to as a “hidden” industrial policy. Their continued dominance, in combination with the failure of the state to effectively intervene, has had a range of negative effects, particularly on downstream industries (Mondliwa and Roberts 2019). In sum, no industrial policy or weak industrial policy is still industrial policy, just one that tends to reinforce entrenched interests and path dependence—in the South African context, entrenching the power of resource-extractive and financial sectors in the economy. At the core of the ongoing debate on industrial policy lies the nature and extent of the state’s role in the economy. Competing visions remain, especially where state capacity is relatively weak. Our view, informed by the analysis above and by the extraordinary role that states have been called upon to play in the course of the COVID-19 crisis, is that the South African state cannot and ought not to cede its responsibilities for development, industrialization, and economic governance in general to market forces. While there is no doubt that, at present, a lack of capacity in the South African state is an obstacle to an ambitious, industrial policyled economic restructuring, we argue that capabilities can be acquired, institutions can be built, and that a route to structural transformation can be forged. In the words of Salazar-Xirinachs et al. (2014, p. 33): …if countries that have been successful in catching up had actually applied the prevailing market orthodoxy, they would not be success stories today. They were successful because their governments were both unorthodox and pragmatic in their approaches. They experimented with different forms of sectoral, trade, education, technology, and macroeconomic policies that allowed them to launch and manage a sustained process of structural transformation and capability building, and they learned from their mistakes and adapted policies accordingly. They applied the principle that ‘the market is a good servant but a bad master’

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Learning from the History of Late Industrialization While for a time controversial, the importance of the state in driving industrialization, especially “late industrialisation” in the twentieth century, is by now well-established. The case of South Korea has become the paradigmatic example of successful late industrialization, and the subject of a great deal of debate. The orthodox position, as put forward by the World Bank and IMF among others, was initially that the success of East Asian industrialization was due in large part to these countries’ governments limiting their involvement in the economy and sticking to the protection of property rights, macroeconomic stability, and trade liberalization. Alice Amsden (1989), Robert Wade (1992), Ha-Joon Chang (1993) and a number of others demonstrated convincingly that this was not the case, and that the state had played an indispensable, highly interventionist role. This role has been multi-faceted in examples of late successful late industrialization, involving protective tariffs, extensive subsidies, regulation of FDI, foreign ownership and access to hard currencies, and, critically, close involvement in flows of credit and financial matters generally (Chang and Zach 2018). The South Korean state also deployed these measures selectively—acting to support particular sectors and industries according to a coordinated and strategic national plan. The power, political will, and technical capacity to support, direct, and discipline capital—private conglomerates, large firms, banks and wealthy individuals—according to this national plan has been identified as a critical prerequisite for successful late industrialization.4 “Reciprocal control mechanisms”—strategic combinations of financing, incentivizing and disciplining instruments—made state support for business conditional on volume and quality of production, export performance and adherence to a national strategic growth plan; support would be withdrawn from

4 Vivek Chibber, a critic of “statist” explanations of South Korean industrialization, correctly emphasizes the roles of complementary interests between Korean and Japanese capital, the role of Cold War-era geopolitics, and other factors, arguing that a finely balanced array of interests and opportunities and not the state alone is responsible for South Korea’s success. However, Chibber does not contest that state influence vis-àvis capital was an important factor; whether this influence is understood as absolute or dependent on a confluence of factors, the state’s role remains critical.

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actors unwilling or unable to deliver on their end of the bargain (Amsden 2001; Salazar-Xirinachs et al. 2014). In stark contrast, the South African state has, in the democratic era, essentially failed to assert its authority vis-à-vis the most powerful fractions of capital (Chabane et al. 2006; Makhaya and Robert 2013). The highly concentrated upstream sectors in which these fractions are embodied continued to benefit from a great deal of direct and indirect state support throughout the post-apartheid period, despite the demonstrably negative effects their continued dominance, rent extraction, and “regulatory capture” have had on manufacturing in particular (Roberts and Rustomjee 2009; das Nair et al. 2014; Zalk 2017; Mondliwa and Roberts 2019; Ndikumana et al. 2020). The state support and continued access to rents which these industries have been able to secure—via tax concessions, state financing, discounted rates on utilities, etc.—have in general been received without reciprocal conditionalities linked to performance, support for diversification, and contribution to structural transformation (Zalk 2014). Access to state support has been retained despite failure to adjust their strategies and behaviors in support of national priorities regarding diversification, employment creation and support for downstream manufacturing (Mondliwa and Roberts 2019). In this sense, South Africa has thus far failed to absorb one of the most critical lessons of successful late industrialization: state support for private enterprise through industrial policy and other mechanisms must be given on a conditional basis, and the state must retain the ability to withdraw such support. In essence, the post-1994 state has been unable to allocate and discipline rents in a strategic and development-enhancing manner, and its strategy for disciplining powerful incumbent firms through trade liberalization has failed to generate the desired outcomes (Mondliwa and Roberts 2019; Ndikumana et al. 2020). This is a strong indication of the post-apartheid state’s weakness vis-à-vis entrenched fractions of capital, and of the need for the state to reassert itself. Identifying and mitigating the sources of this weakness and developing strategies to overcome it ought therefore to be urgently prioritized. The achievement of an inclusive, transformative growth path for South Africa will turn on whether the requisite capacity and vision in the state can be developed, and on whether a sufficiently organized developmental coalition capable of uniting diverse interests behind the imperatives for structural transformation and industrialization can be forged.

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Outstanding Issues and Challenges for Industrial Policy There are a wide range of challenges to overcome in regard to developing and implementing an ambitious industrial policy-led growth strategy in the South African context. Just two are discussed here briefly, one domestic and one international. A potential domestic source of difficulty in implementing a coordinated, industrial policy-led development strategy may be that government responsibility in regard to critical industries and key policy levers is divided among several separate departments. The success of an ambitious industrial policy will depend to a large extent on coordination and policy alignment across a wide range of government departments and agencies. Insufficient coordination between industrial policy and other economic policy areas has been a recurring theme in much of the literature on industrial development in the post-apartheid era (including Kaplan 2007; Roberts and Rustomjee 2009; Zalk 2014, 2017; Bell et al. 2018; Mondliwa and Roberts 2019). Responsibility for and strategic oversight of critical sectors and industries is presently split among the Departments of Mineral Resources and Energy (DMRE), Communications and Digital Technologies (DCDT), and a number of others. Government’s “Economic Cluster” appears to include no fewer than twenty different Ministers and their departments. Critical policy levers required to implement an ambitious industrial policy also appear to be spread between multiple departments and agencies. Policies aimed at capabilities upgrading, innovation, and technological change may require coordination between the DTIC, the Department of Higher Education, Science and Technology (DHEST), the National Treasury, and a range of other departments depending on the industry targeted. Policies designed to leverage public procurement for targeted support of key industries would require coordination across almost all Departments, especially the Departments of Public Enterprises (DPE), Public Works and Infrastructure (DPWI), and those with large and complex procurement needs such as the Departments of Basic Education (DBE) and Health (DOH). Industrial policy measures aiming to raise “patient finance” for long-term growth in higher value-added export industries would need buy-in, sustained commitment and capacity from the Minister of Finance (responsible for the PIC, DBSA, Land Bank, and other key institutions), SARS, SARB, and others.

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Only a coherent set of macroeconomic, trade, investment, sectoral, labor market, and financial policies can adequately respond to the myriad challenges of structural transformation and decent jobs faced by countries today. Strategies to enhance capabilities for high-performing catch-up growth require education, training, investment, trade, and technology policies to promote learning at different levels and in different places— in schools, in enterprises, in social and organizational networks. Focusing systematically on coherence adds another dimension to the debates on industrial policy (Salazar-Xirinachs et al. 2014, p. 4). The need to coordinate industrial policy initiatives across so many different government actors adds a layer of complexity to an already difficult task. While it is beyond the scope of this paper to wade fully into debates on more extensive centralization of government authority in regard to economic policy, it remains worthwhile to note that the existing division of responsibilities may be counterproductive. Indeed, retaining multiple centers of authority and influence may have the effect of helping firms and industries with powerful lobbying capacities to frustrate or subvert government policy, providing more numerous points of access to and influence on policy development and implementation processes than there might otherwise be. As noted in the growing literature on political settlements, “institutional change almost always involves the creation or destruction of rents” (Khan 2000, p. 3). It follows then that the size of the rents and other benefits associated with entrenched dominance and incumbency is likely to incentivize extremely vigorous lobbying and rent-seeking activities aimed against government interventions that may disrupt well-established interests and networks. Consolidating the state’s fragmented approach to economic governance under a common set of goals and principles may therefore play an important role in improving state capacity, insulating policy design and implementation from capture, and improving coordination within government and with the private sector. A second set of difficulties for EMDE aspirations for structural transformation in general arises from the changed nature of the world economy. It is critical to appreciate that the contemporary global political economy presents a range of new challenges for EMDE aspirations for structural transformation that simply didn’t exist when South Korea and the other “Asian Tigers” achieved their late industrialization. Even if one were able to set aside the immediate threats posed by COVID19, climate change and intensified contestation between the USA and

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China, a formidable array of challenges would remain. These include the effects of: global financial liberalization and the volatile international private capital flows (IPCFs) unleashed by this process (generating financial fragility and undermining individual states’ abilities to discipline capital, constraining EMDE policy space in particular); the rise of global value chains dominated by lead firms largely based in advanced economies (in which lead firms monopolize profits through their asymmetrical power in GVCs and force EMDEs into a global “race to the bottom” in wages and working conditions); and the pressure exerted by financialization, which has extended the logic and power of finance capital into the ways that state, households, and firms operate, which in the latter has the effect of siphoning profits into financial markets and away from productive reinvestment (see Chang and Andreoni 2020, for a recent analysis of some of these issues).

The South African Approach to Competition and the Need to Rethink It Despite having one of the world’s most progressive competition law regimes in terms of emphasis on economic redress, inclusion, and public interest, competition policy remains underdeveloped, and outcomes in terms of wider economic participation and competitive rivalry have been poor. A number of critical assessments of South Africa’s competition regime have suggested the need for a re-examination of the assumptions that have underpinned it (see Makhaya and Roberts 2013; Banda et al. 2015). Perhaps most urgently, there is a need to move beyond a notion of competition in which market power and its various symptoms are understood as an aberration, rather than as an intrinsic feature of capitalist economies. The underlying, erroneous assumption of this approach is that markets would function efficiently and produce optimal social outcomes if only things like cartels, collusion, predatory pricing, and other abuses of dominance didn’t exist. Indeed, market power is typically only recognized when the threshold for what is considered abuse of dominance is breached. The key point here is that this theory of competition does not survive contact with reality and is unfit to underpin an important set of tools for economic governance. It is trite that perfectly competitive markets do not exist. In reality, most markets in small, open economies such as South

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Africa’s are characterized by some concentration of resources and imperfect competition. The key question in these contexts is whether effective disciplines on firms with market power are present, and if competitive rivalry between firms is functioning effectively to constrain abuse of market power. Differential economic power always plays a role in capitalist economies, and renewed recognition of this reality has fuelled a growing global consensus that states should not seek to outsource their responsibility for economic governance to the market. However, entrenched structures of economic power cannot be eliminated or even seriously reconfigured by changes in legislation or policy on paper alone. Legislation and policy must actively generate and facilitate countervailing economic forces and disciplines that challenge established interests, restructure markets where this is desirable and incentivize changes in the behavior of dominant firms according to national developmental strategies and in ways that serve national developmental goals. In the South African context, acknowledging the differences between competition law and competition policy is a vital first step for closer coordination between competition policy and other key areas of economic governance. Klaaren et al. (2020) argue that the South African approach has been to conflate the two, with policymakers “[falling] into the trap of understanding legal changes as policy changes and moreover as sufficient policy changes” (p. 1). As a result, interventions have typically taken the form of technical, protracted, expensive, and adversarial legal processes, reducing competition law, policy and enforcement to “a process of seeing just how close to the edge of legality large firms can go” (p. 8). This has had the effect of constraining the potential for competition policy to play a more proactive role in reshaping the economy, reinforcing minimum standards for firm behavior rather than actively lowering barriers to entry, facilitating the growth of new entrants, and incentivizing behaviors that support structural transformation.

An Industrial Policy/Competition Policy Nexus in South Africa? We argue that competition policy can be made to play a more significant and potentially powerful role in economic governance for structural transformation on the basis of a closer alignment with, and in some senses

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subordination to, industrial policy and its objectives. In essence, the critical task for policymakers is to integrate competition policy and enforcement mechanisms with the broader project of structural transformation of the economy. Studies of late industrialization have much to offer in the development of guiding principles for an integration of industrial policy and competition policy. A fundamental point that may be drawn from the pioneering work of Alice Amsden (1989; Amsden and Chu 2003) and others on late industrialization is that, if we are interested in structural transformation, the elimination of dominance by oligopolistic or even monopolistic firms as a general principle ought not to be one that guides our approach to competition. Competition-related interventions ought to be tailored to the needs of specific sectors and industries; a “one-size-fits-all” approach that seeks to promote maximal competition in every part of the economy is unlikely to be productive. There are at least two reasons for this. First, the presence of dominant firms and associated high profitability need not undermine broader developmental objectives, and in fact have historically played a critical role in industrialization. With the right combination of policy coordination, enabling institutions, and enforcement capacity, high profitability in dominant upstream firms can be strategically leveraged to promote downstream diversification and capabilities development. Developmental pricing of key inputs, and the deepening of production, consumption, and technological linkages between dominant firms and those up and downstream from them, are two well-established channels through which oligopolistic/monopolistic profits may promote broader development. Naturally, there is a critical role here for reciprocal control mechanisms in ensuring that rents associated with dominance indeed translate into positive spillover effects and developmental outcomes elsewhere in the economy. Second, large, oligopolistic developing country firms are likely to have distinct advantages in integrating into global supply chains, acquiring organizational efficiencies, advanced technologies and capabilities, and achieving functional upgrading into higher value segments of these supply chains (Chandler et al. 1997). Amsden and Chu (2003) provide evidence from successful cases of upgrading in Taiwan, and emphasize the critical role of achieving economies of scale, particularly when a “latecomer economy” seeks to enter production in sectors where producing at scale is critical to sustained profitability, and firm size plays an important role

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in signaling the capability to deliver on large contracts at lower average costs. Larger firms may be uniquely placed in this regard in many developing countries, including South Africa. In Amsden and Chu’s words, “to survive, a latecomer must exploit unique types of scale economies and manufacture in large volume” (2003, p. 3). In this light, the key question is not how to eliminate oligopoly or even monopoly, but how to assess, using what principles and methods, when unilateral or joint dominance in a given market constrains positive developmental outcomes, and when it has the potential to promote them. It is also critical to ensure that the conduct of large firms can be disciplined, not least because this ensures that they retain the incentive to innovate, invest and develop their capabilities (Vilakazi et al. 2020). As such, competition policy ought not to be preoccupied with ensuring an unattainable, maximal level of competition, operating independently from other areas of economic policy and governance. In concert with other industrial policy measures, competition policy can instead target an “optimal” level of competition for development (Singh 2002; Roberts 2010). That is, an industrial policy/competition policy nexus should promote rivalry in sectors where competitive discipline is likely to generate developmental outcomes, while ensuring that large firms elsewhere are subject to other disciplinary mechanisms (including regulations where applicable) that leverage the rents associated with dominance in a manner that promotes industrialization. In short, competition policy ought to be reconfigured as one of several policy channels that act together to ensure that firms are incentivized to invest, employ and innovate. Further, competition policy ought to have more ambitious and explicitly developmental goals. In relation to the prior discussion of industrial policy, competition policy can act as a key policy lever for strengthening conditionalities linked to national development strategies and objectives. For example, an integrated industrial policy/competition policy perspective might allow for a given firm or group of firms to dominate in a given market on some or all of the following conditions: ● Dominance is achieved and sustained on the basis of efficiency, innovation, and adherence to the rule of law, not through the creation of barriers to entry; ● Above-normal profits (i.e., rents) associated with dominance are reinvested to support innovation and leveraged strategically to

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promote the development of the local production system, particularly of downstream manufacturing; ● Adherence to corporate governance principles that limit and/or roll back the degree to which profits can siphoned out from firms and into financial markets through excessive dividends, share buybacks and financial speculation, or paid out to executives through excessive salaries and stock options; ● Market power in a given sector plays an enabling role in government’s national growth strategy (through export earnings, employment, innovation, functional upgrading in GVC integration, etc.) or in providing for other essentially public goods. Where dominance fails to meet developmental criteria of this sort, competition policy ought to be empowered to actively support new entrants, break down barriers to entry and impose competitive discipline on incumbent firms. In this way, competition policy can more effectively serve developmental goals, supporting industrial policy imperatives to allocate and discipline rents according to the needs of specific sectors and industries. This last point is critical; as discussed previously, both the history of late industrialization and of South Africa’s post-1994 development trajectory suggests that the retention and expansion of industrial capabilities require the state to go beyond a general, “market-enabling” approach and take responsibility for supporting growth in specific areas of the economy via targeted or “selective” measures. In this regard, market inquiry tools used by the competition authorities are especially relevant in that they empower government to understand more systemic factors (including regulations) that undermine inclusion and rivalry in different sectors, rather than narrow investigations of individual firms, for example. Rethinking competition policy and enforcement in a more pragmatic and selective way may therefore provide a strong basis for its closer alignment with industrial policy. Forcing firms to prove the social benefits of their dominant positions rather than forcing the state to prove negative effects thereof would arguably reduce the burden on competition authorities. Linking enforcement measures including fines, breaking up of monopolies/oligopolies, etc. to performance in line with national growth strategies and provision of other public goods would provide industrial policy with a powerful reciprocal control mechanism that it currently lacks.

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Discussion In Sect. 4.2, we set out a number of urgent priorities for South Africa in terms of fostering economic recovery and sustainable, inclusive growth. These include the need to turn high profitability into higher investment, the importance of reviving the manufacturing base, and promote upgrading and diversification; in short, structural transformation of the economy. In this context, we draw out from the preceding sections a number of broad thematic ideas for policy consideration, as part of rethinking the roles of and approach to industrial and competition policies in South Africa. These cut across four core themes: building state capacity; policy alignment and prioritization; commitment to sector/industryspecific interventions; and strategic responses to contemporary global challenges. While previous sections have made it clear that a lack of state capacity is a major obstacle to structural transformation in South Africa, we have also argued that such capacity can be built and must be prioritized. It is also evident that there is no coherent, cross-cutting policy agenda for industrial policy and achieving structural transformation. We make three interrelated proposals in this regard. First, the fragmentation of economic governance must be addressed, and access to key policy levers— particularly those that can be applied to the most concentrated sectors and dominant firms—must be consolidated and brought in line with national development strategies. While such a centralization of economic governance powers is certainly no silver bullet, the current fragmented dispensation is counterproductive, minimizing the state’s ability to incentivize and discipline dominant firms while maximizing the ability of entrenched interests to influence policy and stymy efforts to regulate and govern. A lack of coherence and coordination in South Africa’s approach to economic governance, with different departments and policies operating at cross-purposes, has long been identified as a driver of poor outcomes. It is also a major barrier to building the capacity required to respond effectively to the challenges posed by a volatile global economic context, unequal power relations in global financial markets and value chains, and the effects of financialization on investment in productive capabilities. Second, improving state capacity, as discussed in Chapter 3, will require the development of effective tools and policy levers for economic governance as the economy cannot be effectively managed at arm’s length

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and primarily through suasion. Appeals to the patriotism and goodwill of powerful interests can only take us so far, and ultimately the departments and agencies responsible for industrial policy (and those that are not, for that matter) need effective and powerful policy levers if policy goals are to be met. A critical area where improved policy levers are required is the effective allocation, management, and discipline of economic rents. As argued by Mazzucato et al. (2020), modern economic rents are increasingly sophisticated, and can act through channels other than straightforward price increases to constrain productivity and innovation, and skew the distribution of incomes between capital, labor, and other factors of production and social groupings. There is much further research to be done on these questions in the South African context, but in relation to the role that industrial policy measures and competition policy interventions can play in rent management, we have drawn on South Africa’s industrial policy experience and the history of late industrialization to motivate for the use of “reciprocal control mechanisms” as part of the state’s economic governance toolkit. Market inquiries conducted by competition agencies illustrate the potential positive impact of industry-wide interventions to address systemic inhibitors of rivalry and economic dynamism. Conditionalities on state support in general, performance and developmental requirements for dominant firms, and a range of other reciprocal control mechanisms are well-established as tools with which rents can be managed productively and firm behavior shaped to promote structural transformation. Relevant departments and agencies must be empowered to build and use tools of this sort. History suggests that state capacity is not an abstract quality that some countries have and others don’t, but rather is built up through “learning by doing”; the sooner South Africa commits to learning and starts doing, the better for structural transformation of the economy. Lastly, the project of enhancing state capacity to drive structural transformation is likely to benefit a great deal from a commitment to targeted, sector/industry-level interventions in the economy, rather than general, non-selective interventions that aim to “make markets work” in a general sense. In the South African context, this will require reprioritization of IPAP sectors to focus on support for those with substantial potential to realize employment growth, investment, and diversification. A policy approach that is too broad may lead to suboptimal outcomes from interventions, which is especially problematic in the resource and demand constrained economic environment brought about by economic

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shocks such as the COVID-19 pandemic. Similarly, important decisions need to be made about the historical skewing of industrial policy support to some parts of the economy such as the automotive sector, and the skewing of industrial finance toward traditional industries and market participants rather than driving diversification and investments in innovative, dynamic sectors and firms. A renewed focus on promoting medium- to long-term investment in new technologies and capabilities, including through patient investment and commitment under uncertainty is required (Chang et al. 2020). Driving growth in specific sectors and industries that have been identified as strategically important (in terms of employment, diversification, capabilities upgrading, GVC integration, etc.) will require specific capabilities and intimate knowledge of these sectors and industries. “Intermediate institutions” of the kind used to great effect in Brazil, China, and Malaysia (Andreoni and Tregenna 2018) can play a role in developing these capabilities, housing institutional knowledge, and stimulating productive relationships between the state and private enterprise. The process entailed herein can feed into the reform and improvement of other institutions and agencies involved in economic governance, triggering “processes of collective and cumulative learning” between and within government and private firms (Andreoni 2014; Andreoni and Chang 2017).

Conclusion The performance and trajectory of the South African economy in the last three decades or so, indicative of stalled structural transformation and premature deindustrialization, suggests a need for a major rethinking of the country’s growth strategy. As with countries all over the world, the economic crisis precipitated by the COVID-19 pandemic has brought South Africa’s underlying weaknesses out into the open and has helped to clarify the need for a number of urgent interventions. Our key argument in this paper has been that a closer integration of industrial policy and competition policy, with the overarching goals and strategies of the former guiding the development of the latter, ought to be considered as one of these urgent interventions. We have drawn out a number of lessons for future developments in industrial policy from South African and international experiences, and have made the case for

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competition policy as a more proactive set of tools for opening up participation in the economy, stimulating competitive rivalry, and disciplining and incentivizing firms to invest, produce and build domestic linkages in support of industrial policy goals and national development strategies. Critically, as argued by Klaaren et al. (2020), this entails the growth and development of competition policy beyond the constraints of the existing competition law regime and its institutions. Finally, we have reflected on major challenges for structural transformation in South Africa, including relatively weak state capacity, lack of policy alignment and a number of contemporary challenges faced by all developing countries in a volatile global environment. We argue that a coordinated industrial policy/competition policy nexus focused on strategic, industry-level interventions can play an important role in improving state capacity and policy coordination through processes of “learning by doing.” There is no doubt however that formidable challenges lie ahead; it remains to be seen whether South Africa’s political leadership and organs of state can marshal a sufficiently powerful developmental coalition in support of structural transformation and reindustrialization.

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CHAPTER 5

Monetary and Fiscal Policy Challenges Posed by South Africa’s Deepening Economic Crisis and the COVID-19 Pandemic Nombulelo Gumata

Introduction What are the monetary and fiscal policy challenges posed by the twin challenges of South Africa’s deepening economic crisis and the effects of the COVID-19 pandemic? What have South African policymakers missed or gotten wrong in the policy mix post-2009? The debate on how to respond to the crisis in policy terms is wide-ranging, focusing on tighter co-ordination between monetary and fiscal policy while reinforcing their credibility, on the need to address long-standing structural issues via the implementation of structural reforms, and on the re-evaluation of the

N. Gumata (B) University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_5

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current policy mix to address the macro-economic challenges that face South Africa. This chapter seeks to contribute to this ongoing debate. To this end, it examines a number of issues within the context of the deepening economic crisis that has plagued South Africa in the past few decades and which, in turn, has been compounded by the devastating socio-economic effects of the COVID-19 pandemic. Firstly, and to set the context for discussion, this chapter dissects selected economic and fiscal policy indicators to put into perspective the nature and severity of the monetary and fiscal policy challenges presented by the crisis. It does so with a view to understanding where South Africa is today and what the best available forecasts suggest the outlook is likely to be in the next three to five years. Secondly, the chapter discusses the conditions under which tighter co-ordination of monetary and fiscal policy enhances monetary policy credibility and makes it possible for the central bank to pay attention to economic growth and the unemployment rate. Thirdly, given that inflation regimes matter for the transmission and effectiveness of nominal demand management policy shocks to the real economy, the chapter explores the importance of low and stable inflation, which is crucial for tighter co-ordination between monetary and fiscal policy. The discussion on the importance of low and stable inflation for tighter co-ordination of monetary and fiscal policy is also necessary against the backdrop of the topical discussion on the merits of the Modern Monetary Theory (MMT) as an alternative model to address South Africa’s current macro-economic problems. Fourthly, in light of the heightened debate at the height of the pandemic on large-scale asset purchases (LSAPs) by the South African Reserve Bank (SARB), the chapter explains the objectives of these purchases and the channels through which they are transmitted into financial markets and the real economy. It also briefly touches on the results in other countries that have used LSAPs. Furthermore, the chapter analyzes other central bank balance sheet tools that can be used to achieve the objectives of fiscal sustainability, price, financial and macro-economic stability. In conclusion, the chapter explores various “structural reforms” that need to be implemented to raise output growth over the medium and long-run and close the revenue and expenditure divergence. To best assess where South Africa is, the evolution of selected economic indicators presented in Figs. 5.1 and 5.2 somehow presents a summary of

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Fig. 5.1 Trends in selected economic indicators (Source South African Reserve Bank and author’s calculations) (Note The grey shaded area denotes the recession in 2009. The budget balance as percent of nominal GDP in (a) was smoothed using the 4-quarter moving average.)

the primary objectives of monetary and fiscal policy, namely, fiscal sustainability, price, financial and macro-economic stability. Figure 5.1(a) shows that post-2009, the budget balance as a ratio of nominal GDP (NGDP) widened and this was accompanied by the increase in the debt-to-GDP ratio in Fig. 5.1(b). NGDP growth which is the denominator for the fiscal variables continued to trend downwards in Fig. 5.1(c), the outputgap1 remained persistently negative and widened in Fig. 5.1(e), whereas the unemployment rate continued to rise in Fig. 5.1(d). In this instance, the negative and widening output-gap indicates that demand-side pressures have been very muted post-2009, despite a widening budget deficit. During this period headline inflation in Fig. 5.1(f) has largely remained within the 3–6 per inflation target range. In summary, the trends in Fig. 5.1 present diverging challenges facing monetary and fiscal policy. The price stability mandate as captured by headline inflation poses no immediate threat and is largely achieved. On the other hand, fiscal sustainability and macro-economic stability as captured by output growth, employment growth, and a decline in the unemployment rate have been elusive post-2009 despite the persistently

1 See Ozbek and Ozlale (2005) on the methodology of the estimation of the time varying output-gap.

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Fig. 5.2 Selected fiscal policy indicators and the interest rate-GDP growth differentials (Source South African Reserve Bank and authors’ calculations) (Note The grey shaded area denotes the recession in 2009)

widening budget deficit and an increase in the government debt-to-GDP ratio. With these trends in mind, what are the implications for a countercyclical fiscal policy stance and investment-led growth? What does a persistently widening budget deficit alongside a persistently widening output-gap, and a persistently increasing debt-to-GDP ratio that exists alongside a declining investment-to-GDP ratio as shown in Fig. 5.2(a) mean for the policy mix post-2009? At the same time, expenditure has persistently risen well above revenue in Fig. 5.2(b) and output growth and investment growth have been very subdued. What does this denote about the composition and quality of government spending post-2009? Furthermore, the key variables underlying measures of fiscal sustainability, which is captured by the ten-year yield on government bonds, have persistently increased above, which is captured by nominal and real GDP growth in Fig. 5.2(c, d, and e). Last, the debtservice costs have continued to increase in Fig. 5.2(f). Thus, what other policy tools are available to decrease and increase to help achieve fiscal sustainability? It is also notable that the period post-2009 has been characterized by the divergence in the unemployment rate and inflation in Fig. 5.1(d and f). Whereas the inflation rate has been largely contained with the 3– 6 percent inflation target range, the unemployment rate has increased unabatedly. The trends in the South African data contrast with those

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observed in, for example, the United States (US), where the unemployment rate has declined to pre-global financial crisis levels without triggering any inflationary pressures. What are the implications of widening budget deficits alongside a widening output-gap and increasing debt-to-GDP alongside a declining investment-to-GDP ratio? The trends shown in Fig. 5.1 showed the budget deficit and the negative output-gap have widened post-2009. Similarly, the increasing debt-to-GDP ratio has been accompanied by a declining investmentto-GDP ratio. The Supplementary Budget Review 2020 also showed that under the active scenario, the debt-to-GDP ratio peaks at 87.4% in 2023/2024 and the budget deficit widens to 15.7% in 2020/2021. The SARB at its July 2020 Monetary Policy Committee meeting forecasted that the negative output-gap will widen to −7% in 2020 and remain negative at −2.8% in 2022.2 This means that an increasing debt-to-GDP ratio, a widening budget deficit, and the output-gap are going to be with us for a while. The implication of the trends post-2009 showing that the persistently widening budget deficit has coexisted alongside a persistently widening output-gap; and the increasing debt-to-GDP ratio has been accompanied by a declining investment-to-GDP ratio, is that a countercyclical fiscal policy and highly accommodative fiscal stance post-2009 that was accompanied by accommodative monetary policy3 have performed poorly as policy interventions to increase output growth and potential output. A successful countercyclical and accommodative fiscal policy stance is supposed to dampen the economic slump during recessions and quickly pull the economy out of a slump. This does not mean that these policy interventions had no effects at all. Rather, it is that they were not as potent as initially thought to be in closing the output-gap, stimulating investment growth, and reducing the unemployment rate. There is therefore a case to explore a wider range of potent policy tools and interventions that will amplify the effects of the current policies. The accommodative fiscal policy stance measured in the form of the widening budget deficits, increasing debt-to-GDP ratio, increasing government 2 See https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/ 9946/Forecast%20-%20May%202020%20MPC.pdf. 3 The repo rate was decreased by a cumulative 700 basis points from 12% in November 2011 to 5% in December 2012.

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debt growth and a widening cyclically adjusted budget balance post-2009 have not been the potent policy instruments and interventions through which fiscal deficit-driven stimulus is effectively transmitted into the real economy. These policy measures have not been successful and effective in stabilizing the macro-economy. The economy countenanced a co-existence of widening deficit, widening negative output-gap, and the increasing unemployment rate post-2009. Collectively, these have implications for the fiscal multipliers. Since the beginning of the COVID-19 pandemic, there has been a heightened debate in recent weeks about the size of the fiscal multipliers in South Africa. The chapter does not get into a detailed discussion about the various techniques to estimate the fiscal multipliers and the implications of the estimated sizes of such multipliers. Even so, it contends that the fact that the budget balance as a ratio of nominal GDP has persistently widened alongside a negative and widening output-gap post-2009 and the increasing unemployment rate, casts doubt on assertions that fiscal multipliers are large. And as noted in this chapter, the deficit-financed spending approach that has been adopted post-2009 does not seem to be the most potent and efficient channel through which fiscal policy meaningfully increases economic activity, investment growth and lowers the unemployment rate. What Does a Flat Phillips Curve Mean for Monetary and Fiscal Policy Co-ordination? Recent debates in policy discourse have also been about the co-ordination of fiscal and monetary policy and the conditions under which it produces the best economic outcomes. It is notable that this discussion rarely emphasizes the importance of inflation regimes for the transmission of nominal demand shocks and the effectiveness of policy shocks. Nor does it seriously consider what various inflation regimes mean for the role of the credibility of the conduct of monetary policy and the spill-over effects to fiscal sustainability, financial and macro-economic stability. The Phillips curve characterizes the trade-off faced by monetary policy when making decisions about the appropriate monetary policy stance. The output-gap and inflation (Phillips curve) captures the two variables that play a vital role in the monetary policy objective function. Estimates show that the Phillips curve flattened considerably post-2009, whereas, the relationship between nominal wage inflation and the output-gap and the

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unemployment rate has become negative.4 This means that inflation has become less responsive to the output-gap and is largely driven by other factors and shocks. Clarida (2019) states that a flatter Phillips curve is a proverbial double-edged sword. This is because it allows policymakers to support the full employment mandate more aggressively during economic downturns as a sustained inflation breakout is less likely to occur when the Phillips curve is flatter. The implication of a flat Phillips curve post-2009 in South Africa is that the SARB can put more weight on the output-gap in its decisions, thus supporting employment growth and a decline in the unemployment rate. Monetary policy can support the full employment mandate without exerting undue pressure on the price stability mandate. Nonetheless, a flatter Phillips curve also increases the cost economic output of reversing the unwelcome increases in longer-run inflation expectations. As a result, a flatter Phillips curve makes it more important that longer-run inflation expectations remain anchored at levels consistent with low and stable inflation. Low inflation expectations that are well-anchored are essential to monetary policy in that they minimize the output costs of decreasing inflation, alternatively, the disinflation costs, or sacrifice ratios. Why is Low and Stable Inflation Important for the Co-ordination of Monetary and Fiscal Policy? As stated earlier, contemporary discussions about the co-ordination of monetary and fiscal policy rarely consider the importance of inflation regimes for the transmission of nominal demand shocks and the effectiveness of policy shocks. This chapter refers to low inflation regimes as periods when inflation is below 4.5%. In this regard, Gumata and Ndou (2019a, b) show that a positive nominal demand policy shock, such as increased government spending or expansionary monetary policy, will have a bigger effect on real output in a low inflation regime than in a high inflation regime. This is because real output rises more due to these shocks in a low inflation regime than in a high inflation regime. The slope of the Philips curve is steeper in the high inflation regime than in the low inflation regime. As a result, nominal demand shocks are passed through more to consumer and nominal wage inflation pressures

4 See Gumata and Ndou (2019a, b).

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than to real output growth. Consequently, demand policy interventions are less effective in high inflation regimes. On the other hand, low inflation regimes enhance the effectiveness of the transmission of nominal demand management policy shocks. Policymakers have considerable scope to engage in short-run demand management policies in the low inflation regime than in the high inflation regime. Nominal demand management policy shocks are unlikely to generate much inflation in the low inflation regime relative to the high inflation regime. South Africa needs a low and stable inflation regime to enhance the potency of fiscal, monetary, and other policy shocks. Similarly, periods during which the Taylor curve (namely, the inflation and output-gap volatilities) are minimized are consistent with superior macro-economic performance and stability.5 Thus, a flat Phillips curve, low inflation regimes, and well-anchored inflation expectations enable greater co-ordination between the conduct of monetary and fiscal policy while enhancing the credibility of the monetary policy conduct. It is important to anchor this co-ordination of policies on the credibility of the conduct of monetary policy. And that is because empirical evidence shows that the credibility of the conduct of monetary is high when inflation is below 4.5% .6 The role of demand, supply-side shocks, and the exchange rate passthrough. The previous section stated that Supplementary Budget Review 2020 indicates that the budget deficit widened to 15.7% in 2020/2021 and the SARB forecast that the negative output-gap would widen to −7% in 2020 and remain negative at −1.7% in 2022. The forecast of the widening negative output-gap until 2022 shows that demand-side pressures are highly unlikely to become an immediate threat to the inflation outlook and outcomes. However, it is worth emphasizing that inflationary pressures and shocks do not only emanate from the demand side. On the contrary, they often arise due to supply-side shocks and tend to exert prolonged adverse effects on the inflation outlook and outcomes. It is for this reason that policymakers are always cautious and tend to factor in a reasonable amount of uncertainty about the second-round effects of supply-side shocks on the inflation outlook in their policy settings.

5 See Ndou et al. (2013). 6 See Ndou et al. (2019).

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However, it bears mentioning that, with respect to the supply-side shocks, an important “structural change” has occurred over the years in the form of a substantial decline in the exchange rate pass-through. This means that the ability of the exchange rate to explain movements in consumer price inflation has weakened over time. Ndou et al. (2019) show that the decline in exchange rate pass-through is also on account of improved credibility in the conduct of monetary policy. Improved monetary policy credibility weakens the degree of the exchange rate pass-through and contributed the price stability mandate. Fiscal credibility, quality, and the composition of spending and their role in fiscal sustainability. It was noted earlier that the Supplementary Budget Review 2020 showed that under the active scenario, the debt-to-GDP ratio will peak at 87.4% in 2023/2024. What are the implications of this debt-to-GDP ratio trajectory for fiscal credibility and fiscal sustainability? To demonstrate the impact of an increasing debt-to-GDP ratio on fiscal credibility and sustainability, Ndou et al. (2019) calculate a fiscal credibility indicator which is bounded by a lower limit of the total gross loan debt to GDP of 40 percent and the 60% threshold as the upper limit.7 The interpretation of the fiscal credibility indicator is such that at levels below the lower limit, the risk of fiscal imbalances is low (or even zero), indicating full fiscal credibility and enhanced sustainability. When the debt-to-GDP ratio exceeds 60% , this means an increased probability of fiscal imbalances occurring and the fiscal credibility is low (or even zero). It means, therefore, that as the debt-to-GDP ratio increases and stays above 60% , fiscal credibility is highly weakened and fiscal sustainability risks become more heightened. Figure 5.2(a) shows that the debt-to-GDP ratio and the investment-to-GDP ratio have moved in opposite directions post-2009. These trends speak to the composition and quality of government spending. With respect to the size and quality of government spending shocks, empirical evidence demonstrates that it matters to investors and affects the yield spreads. The yield spreads increase in cases where composition, quality, and efficiency of government spending shocks are seen as unproductive and low.8

7 See Ndou et al. (2019) for further details on the estimation of the fiscal credibility indicator. 8 See Gumata and Ndou (2017) for further reading.

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What monetary and fiscal interventions have been taken so far during the COVID-19 epidemic? Since April 2020, several fiscal policy interventions have been implemented by the South African government to mitigate the effects of the COVID-19 shock on real economic activity. The sub-sections below explore selected policy interventions. Childcare and Unemployment Income Grants In April 2020, the South African government announced that it would introduce a temporary unemployment income grant of R350 to all unemployed people and pay an additional R500 child income grant per caregiver for six months. This was a timely and much needed social intervention. Trends show that child income support grants account for almost 70 percent of all social grants. Furthermore, these are evenly distributed across all nine provinces. On the effectiveness of these policy interventions, evidence in Gumata and Ndou (2019a, b) shows that social income grants although narrow in focus compared to the minimum wage help in decreasing income inequality and also improve the spending capacity of the affected population groups. Nonetheless, fiscal spending via social income grants does not have an impact on employment growth or output growth or investment growth. As such, social income grants are largely part of the demand-side policy interventions. The results in Gumata and Ndou (2019a, b) demonstrate that an increase in social income grants has more persistent positive effects when accompanied by an increase in the binding minimum wage. Thus, a desirable policy intervention is that which complements an increase in social income grants with employment opportunities. An increase in social income grants does help to increase consumption expenditure and alleviates poverty but it needs to be accompanied by job creation opportunities to have more persistent effects. As such, there is a case to be made to extend these social income grants to the affected beneficiaries beyond the initial stipulated six months as the economy adjusts to the COVID-19 shocks and output and employment growth starts to meaningfully pick up. Chapter 7 in this volume provides a detailed rationale for enhanced social protection.

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Conventional Monetary Policy and Financial Regulation Interventions Since January 2020, the repo rate decreased by a cumulative 300 basis points from 6.50 percent in December 2019 to 3.50 in July 2020. This was a substantial monetary policy stimulus in a noticeably short space of time. In addition, the SARB introduced temporary amendments in relation to the minimum requirements relating to the liquidity coverage ratio (LCR) to provide temporary liquidity relief to banks. The Countercyclical Capital Buffer (CCyB) was set at zero. Collectively, these conventional monetary policy and financial regulation interventions eased the monetary stance resulting in accommodative monetary and financial conditions. However, evidence shows that for these measures to be effective and potent, they need to be accompanied by accommodative lending criteria and credit conditions in the form of, for example, high loan-to-value ratios and low repayment-to-income ratios.9 In light of the loosening of the monetary policy stance and various financial regulatory tools, much has been said about the impact of excess liquidity in the banking sector on excessive risk-taking and reckless lending behavior by banks. To this effect, this paper contends that the National Credit Act (NCA) as a financial regulatory tool exists to deal in part with excessive risk-taking and reckless lending in the banking sector. In addition, empirical evidence shows that the NCA affects the loan supply and lending standards. This means that the NCA reinforces the shock effects of monetary policy, macro-prudential, and other financial regulatory tools credit growth and economic activity. Bond Purchases by the South African Reserve Bank The SARB has also embarked on government bond purchases to ease strains in the bond market since March 2020. Since the global financial crisis of 2007–2009, central banks in advanced economies undertook large-scale asset purchases (also referred to as Quantitative Easing or QE) to provide further monetary policy stimulus. The motivations of conducting such large-scale asset purchases have differed across countries, but the common objective has been to reduce long-term interest rates (bond yields), either broadly or in specific markets such as, for example, 9 See Gumata and Ndou (2017).

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the government bond market, the corporate bond market, as well as the mortgage market. For instance, in the case of the US Federal Reserve Bank (US Fed), the stated objective of large-scale asset purchase was to reduce long-term interest rates to spur economic activity.10 Although large-scale asset purchases work through several channels that affect assets differently, the key channels through which they are transmitted to financial markets are the: Signaling channel, which means that asset purchases send a signal to investors that lowers market expectations about the future course of monetary policy. Supply-induced portfolio balance channel. When a central bank purchases long-term bonds, it reduces the amount of these bonds available in the market. This raises their price and lowers their return. Liquidity channel. Large-scale asset purchases involve purchasing longterm securities and paying for these by increasing reserve balances. The reserve balances are more liquid assets than long-term securities. Therefore, QE increases liquidity in the hands of investors, thereby decreasing the liquidity premium on the most liquid bonds. Duration risk channel. By purchasing long-term securities, the central bank reduces the duration risk in the hands of investors by altering the yield curve as long-maturity bond yields relative to short-maturity yields. This is because a change in the relative supply of long-term versus short-term securities affects the spread between long-term and short-term securities. Evidence on bond purchases shows that they reinforce the effectiveness of loose policy rates and tend to be more potent and have incremental effects when conducted over time. The effectiveness of central bank largescale asset purchases does not depend on QE being deployed during a period of market turbulence (Bernanke 2020). In addition, it matters how a given stock of asset purchases is built up over time, as well as how this building up interacts with the other elements of the monetary policy stance. The parameters of the purchase program, such as its size, duration, and composition matter (Cœuré 2018). For instance, Krishnamurthy and Vissing-Jorgensen (2011) show that the large-scale asset purchases effects on assets depend critically on which assets are purchased. In the United States, mortgage-backed securities purchases in QE1 were

10 See various communication statements from the US Fed.

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crucial for lowering mortgage-backed security yields as well as corporate credit risk and corporate yields. The Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and Agencies relative to mortgage-backed securities and corporates. Ampudia et al. (2019) find that the European Central Bank (ECB) asset purchase program decreased income inequality, mostly by reducing the unemployment rate for poorer households and, to a lesser extent, by increasing the wages of the employed. They find that the indirect income channel has an overwhelming importance, especially for households holding few or no liquid assets. The indirect income channel is also a substantial driver of changes in consumption at the aggregate level. The effects of QE can be mostly ascribed due to the disproportionately large drop in the unemployment rate of low-income households produced by the APP. Furthermore, QE has also helped to reduce net wealth inequality slightly through its positive impact on house prices. Although it is still very early days to assess the performance of the SARB asset purchases program, the financial markets, and the real economy, the trends in the ten-year government bond yield and the R/US$ exchange rate post-25 March 2020 in Fig. 3. show that the bond purchases by the SARB have reinforced the accommodative monetary policy stance (cuts in the repo rate) and loosened the financial conditions. In addition, the R/US$ exchange rate appreciation will assist in neutralizing the inflationary pressures, thus supporting the price stability mandate. It is important to state that there are other SARB balance sheet tools that can be used simultaneously with large-scale asset purchases to reinforce their effects and assist in the achievement of the fiscal sustainability, price, financial and macro-economic stability mandates. This paper limits its discussion to large-scale asset purchases. The Loan Guarantee Scheme by the National Treasury, SARB, and the Banking Association The loan guarantee scheme is an initiative to provide loans guaranteed by government to eligible businesses with an annual turnover of less than R300 million to meet some of their operational expenses. The scheme is intended to help small and medium-sized businesses (SMMEs) and funds borrowed through this scheme can be used for operational expenses such as salaries, rent, and lease agreements, as well as contracts with suppliers. Government and commercial banks are sharing the risks of these loans.

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The National Treasury has provided a guarantee to the SARB. This guarantee is recorded as a contingent liability on the government’s account. The SARB takes no financial risk in the scheme as its loans to banks are guaranteed by the National Treasury. Banks are required to check the qualifying criteria of applicants. They will use their existing processes and infrastructure to process loan applications. Banks have discretion on whether they wish to extend a loan to an applicant. The SARB will lend money to commercial banks at the repo rate (currently 4.25%) plus a 0.5% credit premium. Banks will lend this money to small and medium-sized businesses at the repo rate plus a fixed spread of 3.5% (currently 7.75%, equal to the prime lending rate). The customer then has five years to pay off the loan and associated interest. The interest rate is fixed at the repo rate plus 3.5% . Banks cannot vary this condition. This implies that the interest rate will change when the repo rate changes. Any net profits will be pooled to offset losses in the scheme, to minimize total losses to South African taxpayers. To the degree that the risk sharing between the National Treasury and banks neutralizes the impact of risk assessment and pricing on the interest rate charged and non-performing loans on lending to SMMEs, the scheme serves a particularly important role. The interest rate passthrough, lending-repo rate margins, the loan intermediation mark-ups, credit and lending criteria are important aspects in the bank lending value chain. The lending rate-repo rate spread, and the loan intermediation mark-up are sensitive and increase in response to positive shocks to non-performing loans which capture credit risk, whereas the interest rate pass-through declines. Thus, the fact that the interest rate charged on loans under the scheme is fixed at the repo rate plus 3.5% renders the prime rate as the interest rate ceiling or cap at which banks can charge on loans under the scheme. Furthermore, the fact that the interest rate charged will vary one-to-one with changes in the repo rate partly addresses the fact that banks adopt an asymmetric approach to passing through the repo rate changes lending rates.11 The asymmetric transmission of changes in the repo rate means that the size of the interest rate pass-through and loan intermediation markup differs across the monetary policy tightening and loosening cycles.

11 See Ndou et al.(2019).

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Positive (increases) repo rate changes are passed more to the lending rate increase than policy rate decreases of the same magnitude. However, this does not mean that there is no scope to redesign the scheme especially regarding the lending criteria and the interest rate margin at which lending to SMMEs under the scheme is extended.12 This is especially important in light of news reports that the loan rejection rates are very high. The statistics released by the Banking Association of South Africa show that 36 percent of the applications received were declined because they did not meet bank risk criteria or they did not meet the eligibility criteria for the loans, as set out by the National Treasury and the SARB. A mere 0.7% of the applicants were approved. Other Central Bank Balance Sheet Tools that the SARB Can Use to Propagate the Effects the Effects of Conventional Monetary Policy, Macro-Prudential and Financial Regulatory Tools Much of the attention and debate on the central bank balance tools in recent months has only focused on bond purchases by the SARB. The debate rarely reflects on potent central balance sheet tools that contribute to fiscal sustainability, price, financial and macro-economic stability. This paper discusses the other two potent balance sheet tools, namely, the foreign currency reserves accumulation and open market operations in the form of repurchase agreements offered as form of accommodation by the central bank to banks at the discount window. The Accumulation of Foreign Currency Reserves The accumulation of foreign currency reserves (forex reserves) is an important aspect of the monetary policy tools. Foreign currency reserves constituted almost 90% of the SARB’s balance sheet as at the end of 2019. In level terms, forex reserves averaged US$50 billion since 2011 and were approximately R800 billion as at the end of 2019. The channels through which the accumulation of forex reserves shocks operate to support the price, financial and macro-economic stability mandates are the same as

12 See for https://www.banking.org.za/news/june-covid-19-loan-guarantee-update/ https://www.businesslive.co.za/fm/features/2020-06-24-dear-banks-why-has-just-35-ofr200bn-loan-scheme-been-granted/.

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those through which shocks to the repo rate, macro-prudential and financial regulatory tools operate. The difference being the source of the shock and the potency of the tool at hand. To this effect, Chang (2007) shows that within the inflation targeting framework, the implied exchange rate stabilization policy is not for its own sake but is derived from the objectives of stabilizing inflation and the output-gap. These are the two variables in the monetary policymakers’ objective function, alternatively, the policy trade-off as discussed earlier. In addition, Ndou and Gumata (2017) showed that the accumulation of foreign exchange reserves plays a role in appreciating the exchange rate, lowering permanent and overall R/US$ exchange rate volatility, decreasing inflation, and lessening the burden of adjustment on the repo rate while also supporting the price stability mandate. To the extent that these shocks spill over into financial markets affecting the yield on government bonds, they also affect fiscal sustainability. It is for this reason that forex reserves accumulation is a complementary policy approach that can induce additional benefits of reduced welfare costs of elevated inflation hence minimizing the policy trade-off. It is important to clarify why countries accumulate forex reserves— the motive of holding forex reserves and how they are managed. In international literature, there are several motives for holding foreign currency reserves. At the core of most policy approaches, forex reserves are accumulated: To create a buffer against crisis, alternatively, a rainy-day fund; To maintain confidence in the exchange rate centered monetary policy, alternatively, to support the exchange rate policy or serve as a stability fund13 ; For non-precautionary reasons such as to provide a stream of investment income to help finance part of the annual government budget, alternatively, for intergenerational savings or an endowment fund.14 Over the years, as countries have had to respond to various crises, it has become clear that the role of the forex reserves as an endowment fund from which to draw a steady stream of income to finance the government budget will become even more important in the years ahead. In

13 See Chang (2007) on the experiences of Brazil, Chile, Colombia and Peru foreign exchange reserves strategies and motives. 14 See IMF (2011), Menon (2019) and Olivier and Ranciere (2006).

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this manner, the forex reserves as a balance sheet policy tool become an integral part of an approach to achieve fiscal sustainability, price, financial and macro-economic stability. This broad approach to the policy of forex reserves accumulation also brings into sharp focus the role of the Public Investment Corporation as an asset manager and how the national forex reserves are managed. Furthermore, according to the IMF (2011), this is a broad approach to reserves adequacy, which is broader than the balance of paymentsdetermined definition or consideration of reserve assets. Such a broad approach to reserves accumulation complements sound macro-economic and prudential policy frameworks and limits a country’s vulnerability to multiple shocks. Open Market Operations in the Form of Repurchase Agreements Another central balance sheet tool that is rarely engaged with in the debate about central bank balance sheet tools is repurchase agreements in the form of accommodation by the central bank to private banks at the discount window. As at the end of 2019, data showed that banks only use roughly about 2% of funds sourced at the repurchase agreements market to fund themselves—namely, their banking activities. Since the global financial crisis in 2007, central banks have relied on central bank funding in the form of targeted long-term refinancing operations funding (TLTROs) to influence the private banks’ balance sheets developments, funding conditions, and risk-bearing capacity. In this instance, the European Central Bank (2015) points out that as an attractive source of long-term funding, the TLTROs are intended to allow banks to replace more costly sources of funding and extend the maturity of their liabilities to better match that of the lending targeted by the measure. Evidence from the European Central Bank (ECB) shows that the TLTROs resulted in the funding by private banks and significantly extended the maturity of bank funding. The extension of maturity provides banks with funding certainty over a longer period and allows them to better match the maturity of their liabilities with that of assets such as loans to households and firms. In the process, TLTRO borrowers also reduced their recourse to wholesale funding, i.e., issuance of debt securities and interbank borrowing. With respect to the South African case, Gumata and Ndou (2020) show that lengthening of the maturities of funding options available at

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the accommodation can result in the substitution of funding sources by banks on their liabilities side of the balance sheets and the cost of funding. Most importantly, they fund that long-term repurchase agreements will also affect the way banks price lending on their asset side. As such, lengthening of the maturities of funding options available to banks at the accommodation can loosen the funding constraints experienced by banks and this will spill over to the funding of key markets such as the housing sector and SMMEs. In addition, from a policy and regulatory perspective, the lengthening of the maturity of the funding options for banks is especially important given the long-standing regulatory concern of the maturity mismatch risks induced by funding long-term assets such as housing using deposits which are of a short duration. How Do We Deal with Excess Reserves Generated in the Process of Large-Scale Asset Purchases and Forex Reserves Accumulation? One of the issues that have emerged in the debate on bond purchases by the SARB is how to deal with excess reserves that are created in the process of large-scale asset purchases and forex reserves accumulation. Central banks tend to sterilize excess liquidity associated with large-scale asset purchases and forex reserves accumulation so that they do not adversely affect the effectiveness of the monetary policy transmission. To manage excess reserves, central banks also adopt various approaches. For instance, the Federal Reserve began paying interest on required and excess reserve balances. This interest rate was expected to establish a floor under the federal funds rate, whereas, the discount rate, which since January 2003 has been set as a penalty rate above the funds rate target, was expected to limit upward pressure on the funds rate. This operating framework incorporates the essential elements of a “channel” or “corridor” system. Faced with a build-up of excess reserves, the ECB opted to use a negative interest rate policy (negative deposit rate facility). In the case of the ECB, the negative rate also applies to average reserve holdings in excess of the minimum reserve requirements and all other deposits held with the Eurosystem. Like the ECB, the SNB decided to impose negative rates on sight deposit account balances in December 2014. Since January 2015, the SNB has applied negative interest rates within a target range downwards of −1.25% and −0.25% . Central banks also use a tiered approach to manage excess reserves. In this instance,

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central banks use a threshold at which the inflection point of the transition of interbank rates with respect to excess reserves occurs to tier the rate at which excess reserves are remunerated at. There is scant information about how the sterilization deposits due to the forex reserves accumulation policy are managed by the SARB. Nonetheless, based on the cursory reading of SARB publications, sterilization deposits are remunerated at the repo rate plus some margin. What this means is that the SARB manages the sterilization within an interest rate corridor, which is the same approach as other central banks. Like other central banks, the SARB conducts reverse repurchase agreements to manage rand liquidity in the system. Furthermore, the National Treasury has revised the government’s financing strategy to minimize the effect of the deteriorating financial position on its stock of debt and on debt-service costs. The revised strategy includes a draw down on sterilization deposits at the SARB to offset excess market liquidity resulting from the purchase of foreign currency reserves.15 In closing this discussion about various central bank balance sheet tools, it is necessary to answer the following questions. Do large-scale asset purchases achieve the desired effects? As demonstrated in this chapter, they do. Do they result in excess reserves that need to be sterilized to manage liquidity and the functioning of the interbank market? Certainly. Evidence from several countries that have embarked on largescale asset purchases shows that countries adopt different approaches in dealing with this. These are the same effects that policymakers are confronted with when they accumulate foreign currency reserves. Policymakers manage policy consequences as long as the stated objectives are achieved. The key consideration is that all policy interventions have undesirable consequences that must be properly managed. How Do We Raise Output Growth Over the Medium and Long-Run and Close the Revenue and Expenditure Divergence? As stated earlier, fiscal sustainability is driven largely by the difference between the average interest rate that governments pay on their debt and the nominal or real growth rate of the economy. In addition, all the major government ratios have a common denominator in the form 15 See http://www.treasury.gov.za/comm_media/speeches/2020/20200723%20Mini ster%20of%20Finance%20Speech%20-%20Budget%20Vote%202020.pdf.

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of nominal GDP. Flowing from this, it is important to reflect briefly on how to raise output growth over the medium and long-run and close the revenue and expenditure divergence. This section concludes the discussion in the paper by linking the previous analysis with sectoral “structural reform” policies that can raise nominal and real GDP growth. The analysis is limited to the role of accelerated land reform, the agricultural, mining, and the manufacturing sectors. The Role of Accelerated Land Reform, Redistribution and an Increase in Hectares Planted in Increasing Potential and Actual Output Accelerated land reform and land redistribution are broader policy interventions aimed at dealing with the problem of poverty and inequality. They are supply-side policy interventions designed to spur GDP growth, change ownership patterns in the economy, as well as increase economic participation sand labor absorption. Evidence in Gumata and Ndou (2019a, b) shows that the agricultural sector is more responsive to export demand, and this increases the employment growth intensity in the agricultural sector. The exportoriented growth strategy augurs well for agricultural sector output, employment, and labor productivity growth. Land reform and redistribution must be accelerated, and this must be accompanied by heightened investment growth, as well as heightened government support for the agricultural sector to venture into new export markets. The Mining Sector and Minerals Beneficiation as an Approach to Raise Potential and Actual Output On the other hand, evidence for the mining and specific commodity sectors confirms the validity of the dominance of the “exports-led GDP growth” hypothesis over the “GDP growth-driven exports growth” hypothesis. Export growth in the mining sector is intensively associated with mining commodity employment growth and less so with mining commodity gross value addition. But these positive effects are not persistent and do not result in intensive employment growth. Hence, the export-led strategy seems to be quite disappointing. Export-led growth is a necessary but insufficient condition for job creation in the mining sector. Therefore, the contribution of the mining sector to output growth has been on a circular decline and so low. The mining sector is an export

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driven sector with extremely limited value addition. This implies that there is a strong case for mineral beneficiation. By its very nature, minerals beneficiation implies an increase in the value added and a bigger role for the manufacturing sector in output growth. Thus, strategies aimed at investing in the value chains for these mining commodity sectors, development of new export markets and cushioning the sector against the cyclicality and severe slumps in global demand and commodity prices will support the mining sector. The Manufacturing Sector as a Driver of Output and Employment Growth The manufacturing sector explains 71% of the variation in GDP growth and 41% of the variation in private sector employment growth.16 This means that the manufacturing sector will play a key role in increasing output and employment. In addition, evidence shows that the (i) construction sector followed by (ii) finance, insurance, real estate, and business services sector; (iii) transport, storage, and communication sector and (iv) wholesale and retail trade, catering, and accommodation sector are more responsive to positive GDP growth shocks. Alternatively, these sectors have a high output-employment growth intensity. The period post-2009 was characterized by a massive and persistent depreciation in the exchange rate that was not accompanied by export growth. This is because evidence shows that the contractionary effects of large real exchange rate depreciations via the balance sheet and investment channels have detrimental effects on investment growth and output growth, over and above neutralizing the beneficial effects of exports growth. The contractionary effects of large exchange rate effects tend to be a drag on investment growth and far outweigh those of competitiveness and export growth. This evidence implies that policymakers cannot depreciate their way to output growth solely via the exports growth channel alone. Evidence post-2009 shows that the exchange rate depreciation plays an extremely limited role in stimulating domestic growth via the exports growth channel. This means that policymakers must place urgency and more weight on efforts to identify the exchange policy and strategy of dealing with the adverse effects of severe deprecation and volatility on investment and economic growth. As such, structural reforms and policy interventions to rebalance the economy from high dependency

16 This is on a bilateral basis.

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on imports should consider the effects of: the high import content; the design of the exchange policy; interventions that stabilize electricity price inflation below 6 percent; increase in labor productivity growth; and the effective use of competition policy to preserve a competitive environment that supports SMMEs and reduces income inequality.

Conclusion This chapter examined monetary and fiscal policy challenges posed by South Africa’s deepening economic crisis and the impact of the COVID19 pandemic. It showed that the policy post-2009 has clearly not yielded the desired effects. The widening budget deficit has coexisted alongside the widening negative output-gap and an increase in the unemployment rate. Similarly, while the debt-to-GDP ratio had increased, the investment-to-GDP ratio has declined indicating that the quality and composition of government expenditure have not created a conducive environment for investment growth and output growth. The chapter has put forward the argument that because and lie at the center of fiscal sustainability, a combination of structural reforms that lift and tighter co-ordination between monetary and fiscal policy that lead to a decrease in are necessary policy interventions going forward. We showed that for tighter co-ordination between monetary and fiscal policy to be successful, a low and stable inflation environment is necessary. This is because nominal demand management policy shocks are unlikely to generate much inflation in the low inflation regime relative to the high inflation regime. In addition, the credibility of the conduct of monetary policy is enhanced in the low inflation regimes and this has positive effects on other factors that affect the inflation outlook such as the exchange rate pass-through and well-anchored inflation expectations. Furthermore, the chapter showed that there are other central bank balance sheet tools over and above bond purchases that can be used to contribute to fiscal sustainability, price, financial and macro-economic stability.

References Ampudia, M. D., Georgarakos, J. Slacalek, O. Tristani, P. Vermeulen and G.L. Violant. 2019. Monetary Policy and Household Inequality. ECB Working Paper No 2170 / July 2018.

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Bernanke, B. S. 2020. The New Tools of Monetary Policy American Economic Association Presidential Address Bordo, M.D. and P.L. Siklos. 2014. Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspectives. NBER Working Paper No. 20693. Bordo, M.D. and P.L. Siklos. 2015. Central Bank Credibility and Reputation a Historical Exploration. NBER Working 20824. Blyth, M. 2013. Austerity: The History of a Dangerous Idea. Oxford UK: Oxford University Press. Chang, R. 2007. Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America. Papers and Proceedings – Inflation Targeting. Christensen, Jens H. E. and Signe Krogstrup. 2018. A Portfolio Model of Quantitative Easing. Federal Reserve Bank of San Francisco Working Paper 2016–12. Christensen, Jens H.E. and Signe Krogstrup. 2016. Transmission of Quantitative Easing: The Role of Central Bank Reserves. Federal Reserve Bank of San Francisco Working Paper 2014–18. Clarida, R.H. 2019. The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices. Speech given at The Bank of Finland Conference on Monetary Policy and Future of Economic and Monetary Union, Helsinki, Finland. Cœuré, B. 2018. The Persistence and Signalling Power of Central Bank Asset Purchase Programmes. Speech at the 2018 US Monetary Policy Forum, New York City, 23 February 2018 Engemann K. 2020. What Is the Phillips Curve (and Why Has It Flattened)? Federal Reserve of St, Louis. https://www.stlouisfed.org/open-vault/2020/ january/what-is-phillips-curve-why-flattened. European Central Bank. 2015. Annual Report. https://www.ecb.europa.eu/ pub/pdf/annrep/ar2015en.pdf. Further Amendments to the Money Market Liquidity Management Strategy of the South African Reserve Bank and additions to the Monetary Policy Portfolio. https://www.resbank.co.za/Lists/News%20and%20Publications/ Attachments/9805/Further%20amendments%20to%20the%20money%20m arket%20liquidity%20management%20strategy%20of%20the%20SARB.pdf. Gumata, N. and E. Ndou. 2017. Bank Credit Extension and Real Economic Activity in South Africa: The Impact of Capital Flow Dynamics. Bank regulation and Selected Macro-Prudential Tools. Palgrave Macmillan. ISBN 978-3-319-43550-3 Gumata, N., and E. Ndou. 2019a. Capital Flows, Credit Markets and Growth in South Africa: The Role of Global Economic Growth, Policy Shifts and Uncertainties. Palgrave Macmillan. ISBN 978–3–030–30887–2

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Gumata, N., and E. Ndou. 2019b. Accelerated Land Reform, Mining, Growth, Unemployment, and Inequality in South Africa: A Case for Bold Supply Side Policy Interventions. Palgrave Macmillan. ISBN 978–3–030–30884–1 Gumata, N., and E. Ndou. 2021. Achieving Price, Financial and Macro-Economic Stability in South Africa: The Role of the Central Bank Balance Sheet, MacroPrudential Tools, Financial Regulations and Analysis. Palgrave Macmillan. ISBN 9783030663407. Gumata, N., and E. Ndou. 2020. The Secular Decline of the South African Manufacturing Sector - Policy Interventions, Missing Links and Gaps in Discussions. Palgrave Macmillan. Forthcoming. IMF. 2011. Assessing Reserve Adequacy. Third IMF Roundtable of Sovereign Asset and Reserves Managers. Krishnamurthy A and Vissing-Jorgensen, A., 2011. The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy. NBER Working Paper No. 17555. Lopez-Villavicenzio, A., and V. Mignon. 2017. Exchange Rate Passthrough in Emerging Countries: Do the Inflation Environment, Monetary Policy Regime and Central Bank Behaviour Matter? Journal of International Money and Finance, 79, 20-38. Menon, M., 2019. How Singapore Manages Its Reserves. Keynote Speech at the National Asset-Liability Management Europe Conference, Singapore, 13 March 2019. National Treasury. Supplementary Budget Review 2020. http://www.treasury. gov.za/documents/National%20Budget/2020S/review/FullSBR.pdf. National Treasury. The Loan Guarantee Scheme. http://www.treasury.gov. za/comm_media/press/2020/20200512%20Media%20statement%20-%20L oan%20guarantee%20scheme%20opens.pdf. National Treasury. The Loan Guarantee Scheme Frequently Asked Questions. http://www.treasury.gov.za/comm_media/press/2020/COVID19%20L oan%20Guarantee%20Scheme%20Q&A.pdf. Ndou,E., N. Gumata, M. Ncube and E. Olson. 2013. An Empirical Investigation of the Taylor Curve in South Africa. African Development Working Paper No 189 – December 2013. https://www.afdb.org/fileadmin/upl oads/afdb/Documents/Publications/Working_Paper_189_-_An_Empirical_ Investigation_of_the_Taylor_Curve_in_South_Africa.pdf. Ndou, E., and N. Gumata. 2017. Inflation Dynamics in South Africa: The Role of Thresholds, Exchange Rate Pass-through and Inflation Expectations of Policy Trade-offs. Palgrave Macmillan. ISBN 978-3-319-46702-3 Ndou, E., N. Gumata and M. Ncube. 2017. Global Economic Uncertainties and Exchange Rate Shocks: Transmission Channels to the South African Economy. Palgrave Macmillan. ISBN 978–3–319–62279–8

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Ndou, E., N.Gumata and M.M. Tshuma. 2019. Exchange Rate, Second Round Effects, and Inflation Process: Evidence from South Africa. Palgrave Macmillan. ISBN 978–3–030013932–2 Olivier, J. and R. Ranciere. 2006. The Optimal Level of International Reserves for Developing Countries: Formulas and Applications. IMF Working Paper 06/229. Ozbek, L. and U.Ozlale. 2005. Employing the extended Kalman Filter in measuring the output-gap. Journal of Economic Dynamics and Control. Elsevier, vol. 29(9): 1611–1622, September. South African Reserve Bank Prudential Authority. Directive D1/2020 issued in terms of section 6(6) of the Banks Act 94 of 1990. https://www.resbank.co. za/Lists/News%20and%20Publications/Attachments/9821/D1%20of%202 020%20%20Temporary%20Measures%20to%20aid%20compliance%20with% 20the%20LCR%20during%20COVID-19%20pandemic%20stress%20period. pdf. The Transmission of the ECB’s Recent Non-Standard Monetary Policy Measures. 2015. ECB Economic Bulletin, Issue 7. https://www.ecb.europa.eu/pub/ pdf/other/eb201507_article01.en.pdf. Various South African Reserve Bank Monetary Policy Statements. https://www. resbank.co.za/Publications/Statements/Pages/MonetaryPolicyStatements. aspx.

CHAPTER 6

The Short-Term Labor Market Effects of South Africa’s National COVID-19 Lockdown Timothy Kohler, Haroon Bhorat, Robert Hill, and Benjamin Stanwix

Introduction South Africa has been one of the countries affected most adversely by the COVID-19 pandemic in Africa. In response, like most governments around the world, the country implemented a lockdown to prepare the necessary health infrastructure as well as to delay and minimize the spread of the virus. This initial lockdown, which began on March 26, 2020, and lasted for five weeks, was relatively stringent by international standards (Bhorat et al. 2020; Gustafsson 2020), making no allowance for any nonessential activities outside the home. All schools were closed, a curfew was

T. Kohler (B) · R. Hill · B. Stanwix School of Economics, Development Policy Research Unit, University of Cape Town, Cape Town, South Africa e-mail: [email protected] R. Hill e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_6

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enforced, and only workers in occupations deemed essential for economic function and pandemic response were permitted to work. Following this initial lockdown period, a phased easing of restrictions was introduced in five levels, with the initial lockdown period classified as level 5. Regulation under levels 4 (1–31 May) and 3 (1 June to 17 August) gradually permitted specific categories of “non-essential” work to resume. Estimates using pre-crisis data suggest that just 40% of the employed were permitted to work under level 5, rising to 71% under level 3 (Francis et al. 2020). Although the pandemic continues to pose important risks to public health, South Africa’s lockdown was always expected to lead to substantial short- and long-term economic costs. Official labor force data shows that millions of jobs were lost and only a partial recovery has so far been observed in the data by the end of 2020, with net employment still down 1.4 million relative to pre-pandemic levels. Research conducted during the lockdown suggests that job losses have been concentrated among a range of already vulnerable groups, particularly individuals in the poorest households (Köhler and Bhorat 2020), less-skilled and lowwage workers (Jain et al. 2020; Ranchhod and Daniels 2020), informal workers (Benhura and Magejo 2020), those with transient employment or persistent non-employment histories (Espi et al. 2020), those living in poor urban communities (Visagie and Turok 2020), and women— particularly the poorest (Hill and Köhler 2020; Casale and Posel 2020; Casale and Shepherd 2020). Many of these findings are consistent with those observed in labor markets across the world (International Labour Organization [ILO] 2020). In this paper, we make use of nationally representative labor force data to conduct a descriptive, empirical analysis on both aggregate and between-group variation in labor market outcomes over time on both the extensive and intensive margins to obtain an in-depth and nuanced overview of how the pandemic affected the South African labor market

B. Stanwix e-mail: [email protected] H. Bhorat Development Policy Research Unit, University of Cape Town, Cape Town, South Africa e-mail: [email protected]

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in the short-term. Following the onset of the pandemic and lockdown, we show that aggregate employment reduced by 2.2 million (14%), erasing the last decade’s worth of progress on jobs growth. We also document a substantial decrease in the number of jobseekers (by nearly 40%, or 2.7 million) and an increase in economic inactivity (by 33%, or more than 5 million). Employment loss was concentrated among several vulnerable groups including the youth, those with lower levels of formal education, and those living in urban areas, lower- and semiskilled workers, and those working in the secondary sector. Almost all employment loss was observed in the private sector or among union nonmembers, and geographically, after accounting for national employment shares, we observe that the Northern Cape, Free State, and Limpopo suffered the largest relative employment losses. Notably, the pandemic particularly jeopardized the livelihoods of workers in the informal sector, who accounted for half of all net jobs lost despite representing just 25% of pre-pandemic employment. The vulnerability of this group to the economic consequences of the pandemic is of concern, given that their informality presents a challenge for government to provide targeted relief. Considering outcomes other than employment, we document notable changes in the distribution of working hours. Aggregate working hours fell by approximately 200 million hours (or 28%) in the short-term, while the average worker worked 7.2 fewer hours per week and the share of zero-hour workers increased from 1.5% (200,000 workers) to 16% (2.3 million workers). This latter observation is characteristic of lockdown policy, which induced an inability for both job-losers and jobseekers to engage in the labor market. The analysis in this paper uses individual-level survey data from Statistics South Africa’s (StatsSA) Quarterly Labour Force Survey (QLFS). The QLFS is a cross-sectional, nationally representative household survey, conducted every quarter since 2008, that contains detailed information on a wide array of demographic and socioeconomic characteristics and labor market activities for individuals aged 15 years and older. Although it is a cross-sectional dataset, the QLFS does have a panel component, where 75% of the household sample is resurveyed in each quarter. This makes it possible to follow the same dwelling unit for four consecutive quarters. However, there are a number of important differences in the 2020 QLFS data that are worth noting in some detail here. Prior to the COVID-19 pandemic in South Africa, the QLFS sample consisted of nearly 70,000 individuals, living in approximately 30,000

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dwelling units, with data being collected via face-to-face interviews. However, toward the end of March 2020, StatsSA suspended face-toface data collection as a result of COVID-19. Because of this, 621 sampled dwelling units (or 2% of the sample) were not interviewed in the quarter 1 dataset. To adjust for this, StatsSA used the panel component of the survey and made imputations where possible, using data from the previous quarter. To continue providing labor market statistics for the second quarter of the year during the national lockdown, StatsSA changed its data collection model from face-to-face interviews to computer-assisted telephone interviewing (CATI). To facilitate this, and unlike in previous quarters, the sample that was surveyed in 2020Q1 and for which StatsSA had contact numbers was surveyed again in 2020Q2. The result was that the 2020Q2 data included about 71% of the 2020Q1 sample because not all dwelling units had contact numbers.1 The obvious concern here is that this will produce 2020Q2 estimates that suffer from selection bias; that is, it is likely that the underlying characteristics of “telephone” and “non-telephone” households are different. For example, we know from the 2020Q1 data that individuals in “non-telephone households” were significantly more likely to be unemployed relative to those in “telephone households”. To address this source of bias, StatsSA took several steps to adjust the calibrated survey weights, using the 2020Q1 data and several bias-adjustment factors, which we do not discuss here in detail. Table 6.1 presents an overview of the sample sizes and weighted estimates of the South African labor market for 2020Q1 and 2020Q2. We use the relevant bias-adjusted sampling weights provided by StatsSA unless otherwise indicated and restrict the sample to the working-age population (those aged 15–64 years). Looking at the aggregated data, the bias-adjusted 2020Q2 weights appear to be appropriately computed. From an unweighted sample of 66 657 individuals, the weighted estimate of the South African population in 2020Q1 is 57.8 million. The relevant 2020Q2 estimate is just under 58 million, despite the 2020Q2 sample consisting of nearly 20,000 fewer individuals. This is similar for the working-age population. In contrast, the weighted estimates of specific

1 Additionally, among those who did have contact numbers, some contact numbers were found to be invalid or were not answered during data collection, and some households indicated that they were no longer residing at the dwelling units they had occupied during 2020Q1. All of these were regarded as non-contact and were adjusted for during the weighting processes.

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Table 6.1 Sample sizes and weighted population estimates, by quarter 2020Q1

Total Working-age population Labor force Employed Unemployed Discouraged Not economically active

2020Q2

Unweighted

Weighted

Unweighted

66,657 41,827 24,549 17,044 7,505 3,149 14,129

57,792,395 38,873,945 23,452,204 16,382,555 7,069,649 2,918,028 12,503,712

47,103 29,495 13,023 10,001 3,022 1,865 14,607

Weighted 57,973,917 39,021,017 18,443,066* 14,148,215* 4,294,851* 2,470,782* 18,107,168*

Source QLFS 2020Q1 and 2020Q2 (StatsSA). Authors’ own calculations Notes [1] Relevant estimates weighted using sampling weights. [2] Labor market groups restricted to the working age (15–64 years). [3] Official (narrow) definitions of unemployment used. [4] *denotes statistical significance of a different 2020Q2 estimate relative to the relevant 2020Q1 estimate at the 95% confidence level

labor market groups (such as the labor force and number of employed) are statistically significantly different in size between quarters, which is what we would expect to see as a result of the pandemic and associated government responses. However, it should be noted that the sampling bias adjustments by StatsSA relied on observable characteristics, such as age, gender, and race; however, respondents may still be unobservably different from non-respondents, and hence possibly from the broader population. At the time of writing, an explicit external review of the construction of these weights has yet to be conducted and would require more information than is available in the public QLFS documentation.

Results Aggregate Shifts in Key Labor Market Indicators In Fig. 6.1 we present aggregate trends in key labor market indicators in South Africa for recent years. Expectedly, the pandemic led to a substantial reduction in the number of employed in the country. Relative to 2020Q1, there were more than 2.2 million fewer employed people in 2020Q2—a 14% decrease, which is equivalent to employment levels between 2008 and 2012. This drop in employment was coupled with a decrease in the number of official (searching) unemployed individuals (by nearly 40%, or 2.7 million), and an even larger absolute increase in

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Fig. 6.1 Trends in key labor market indicators, 2008Q1–2020Q2 (Source QLFS 2008Q1 to 2020Q2 [StatsSA]. Authors’ own calculations) (Notes [1] All estimates weighted using relevant sampling weights. [2] Official (narrow) definition of unemployment used throughout)

the number of economically inactive individuals (by 33%, or more than 5 million).2 These shifts can to a large extent be explained by the nature of the national lockdown policy, which restricted the ability of people to work and to search for work. Together, these large shifts explain the, if observed alone, misleading decrease in the official unemployment rate from 30 to 23%—the lowest recorded since the start of the QLFS— reflecting a simple definitional consequence. These unusual changes in employment, unemployment, and inactivity have been observed in labor markets across the world (ILO, 2020), but must be accepted as nothing more than a statistical anomaly brought about by the inability of the unemployed to search for jobs. 2 This latter group are not classified among the discouraged unemployed because, when asked why they were not looking for work, individuals in this group responded with reasons “Other” than discouragement. This reason can be attributed to the national lockdown policy, which restricted any activity deemed “non-essential” outside the home.

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In addition to these cross-sectional trends, we can use the panel nature of the QLFS 2020Q1 and 2020Q2 data to measure transitions between different labor market states for a more accurate sense of the quarter-on-quarter shifts taking place. Table 6.2 shows that nearly one in every four (22.05%) of those who were employed in 2020Q1 were no longer employed in the following quarter, with most (16.14%) becoming economically inactive. Importantly, just under 6% of the previously employed reported looking for work in the next quarter. Also, more than half (55%) of the searching unemployed in 2020Q1 became inactive the next quarter, whereas only a third (34%) continued searching for work. The vast majority (80%) of those who were economically inactive in 2020Q1 remained inactive in 2020Q2. Again, the substantial increase in the number of individuals who became inactive for reasons categorized as “Other” is evident here. This is a notable characteristic of the lockdown: the policy induced an inability to engage in the labor market, either due to job loss or to the implicit prohibition of job search for both first-time entrants and long-term jobseekers. In addition to changes in employment status, the pandemic has resulted in significant changes in labor market outcomes, even among those who managed to retain their employment; that is, changes in the intensive margin. In particular, we observe a sharp reduction in working hours. Only 1.5% of workers reported working zero hours per week in 2020Q1, but this jumps to 16% in the next quarter after the lockdown was introduced. This represents an increase from 250,000 workers to 2.2 million workers. Importantly, the data suggests that this increase was driven mostly by reductions among those who previously worked 40 and 45 hours per week. Overall, through examining changes in the aggregation of working hours among the employed, the South African labor market lost approximately 200 million working hours (or 28%) from 2020Q1 to 2020Q2. Another notable change in labor market outcomes on the intensive margin relates to changes in the wages of those who remained employed. Unfortunately, due to data unavailability, we are unable to conduct such an analysis here.

Variation in Labor Market Outcomes Within and Between Groups The observed changes in aggregate labor market outcomes above are important to consider, however, they hide substantial underlying

Total

Employed Unemployed NEA Discouraged Other

77.95 10.55 7.68 3.15 34.95

Employed

2020Q2 (%)

5.91 34.06 12.51 3.22 9.96

Unemployed

2.04 10.38 33.86 2.59 5.68

Discouraged

NEA

Transition matrix of conventional labor market statuses, 2020Q1–2020Q2

14.10 45.01 45.95 91.04 49.41

Other

Total 100.00 100.00 100.00 100.00 100.00

Source QLFS 2020Q1 and 2020Q2 (StatsSA). Authors’ own calculations Notes [1] Sample restricted to working-age population (15 to 64 years). [2] Estimates weighted using 2020Q2 bias-adjusted sampling weights

2020Q1 (%)

Table 6.2

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between- and within-group variation. Along multiple dimensions in the South African labor market, the distribution of job loss has been uneven. Table 6.3 presents year-on-year changes in employment for a variety of demographic characteristics and includes employment shares and the shares of change in each case. This helps us to determine (i) how the composition of the labor market has changed and (ii) which groups were disproportionately affected. Of the 2.2 million fewer people employed in 2020Q2, African/Black individuals accounted for nearly 78%, or 1.7 million people—a slightly disproportionate burden of employment loss given that this group accounted for 75% of the employed prior to the lockdown. On the other hand, just 150,000 fewer White individuals were employed in 2020Q2 relative to before the pandemic, representing just 7% of employment loss despite accounting for 11.3% of the pre-pandemic employed. Considering gender, men accounted for a slightly higher share of employment loss (55.5%), with 1.2 million fewer employed. However, women were disproportionately affected, given that they accounted for a smaller share of pre-pandemic employment (43.7%), although this is small differentially. Perhaps most significantly, youth accounted for about half (50.6%, or 1.1 million) of employment loss, despite representing only just over a third (36.6%) of pre-pandemic employment. Employment loss was disproportionately concentrated among individuals with relatively low levels of formal education, those living in urban areas, those working in the informal sector or private households, the private sector, and the non-unionized. Individuals whose highest level of education is less than Grade 12 (matric) or equivalent accounted for more than 70% of employment loss (or 1.5 million people), despite representing only 45% of pre-pandemic employment. Job losses were also concentrated in urban areas—as rural areas accounted for only 21% of the total employment loss. Notably, although employment loss in the informal sector and private households together represent about half of total employment loss, these sectors accounted for just under 28% of pre-pandemic employment, showing that they were affected disproportionately. Most pre-pandemic employment (73.6%) in South Africa is in the formal sector, although the sector accounted for a relatively smaller share of job loss (52.2%). Remarkably, almost all (93.8%) jobs lost were in the private sector, despite the public sector accounting for nearly one in every five (17.4%) of the employed prior to the pandemic. Similarly, nearly all those

14,148,215 10,554,996 1,412,289 488,224 1,692,706 7,977,963 6,170,252 4,869,685 7,866,851 1,411,680 1,329,658 4,443,230 4,846,446 3,389,699

12,250,320 1,686,611 530,391 1,845,384 9,179,612 7,133,094 5,964,514 8,749,069 1,599,122 1,879,845 5,360,983 5,346,917 3,511,214

2020Q2

16,312,706

2019Q2 % −13.3 −13.8 −16.3 −8.0 −8.3 −13.1 −13.5 −18.4 −10.1 −11.7 −29.3 −17.1 −9.4 −3.5

Absolute −2,164,491 −1,695,324 −274,322 −42,167 −152,678 −1,201,649 −962,842 −1,094,829 −882,219 −187,442 −550,188 −917,753 −500,471 −121,516

Change

11.7 33.3 33.2 21.8

36.6 53.6 9.8

56.3 43.7

75.1 10.3 3.3 11.3

100.0

2019Q2

9.5 31.7 34.6 24.2

34.4 55.6 10.0

56.4 43.6

74.6 10.0 3.5 12.0

100.0

2020Q2

Employment shares (%)

Year-on-year changes in employment by select demographic and labor market groups

Total Race African/Black Colored Indian/Asian White Sex Male Female Age group 15–34 35–54 55–64 Education Primary or less Secondary incomplete Secondary complete (matric) Post–secondary Geography

Table 6.3

26.33 43.91 23.95 5.81

50.6 40.8 8.7

55.5 44.5

78.3 12.7 1.9 7.1

100.0

Share of change (%)

138 T. KOHLER ET AL.

10,762,283 3,385,932 10,881,660 2,435,950 1,019,109 11,599,189 2,698,836 4,203,095 7,280,290 320,010

12,475,465 3,837,240 12,012,387 3,249,666 1,273,358 13,629,880 2,843,080 3,948,660 9,339,867 475,084

2020Q2

−9.4 −25.0 −20.0 −14.9 −5.1

−1,130,727 −813,716 −254,249 −2,030,691 −144,244 6.4 −22.1 −32.6

−13.7 −11.8

−1,713,182 −451,308

254,436 −2,059,577 −155,074

%

Absolute

Change

24.2 57.3 2.9

83.6 17.4

73.6 19.9 7.8

77.5 23.8

2019Q2

29.7 51.5 2.3

82.0 19.1

76.9 17.2 7.2

76.8 24.2

2020Q2

Employment shares (%)

−11.8 95.2 7.2

93.8 6.7

52.2 37.6 11.7

79.1 20.9

Share of change (%)

Source QLFS 2019Q2 and 2020Q2 (StatsSA). Authors’ own calculations Notes [1] Sample restricted to working-age population (15–64 years). [2] All estimates weighted using relevant sampling weights

Urban Rural or traditional area Formality Formal Informal Private households Sector Private Public Unionization Member Non-member Do not know

2019Q2

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who lost jobs (95.2%) were non-union members. In fact, union membership numbers grew slightly over the period, from 3.95 million to 4.2 million individuals, although this change was not statistically significant. Significant regional variation in employment changes is also evident. Geographically, variation in net employment changes across the country at the district-level. Of the largest districts, eThekwini in KwaZuluNatal (KZN) experienced the most severe contraction of 17%, closely followed by Ekurhuleni and the City of Johannesburg in GP (16% and 14%, respectively). By province, Gauteng (GP), KwaZulu-Natal (KZN), and the Western Cape (WC)—the largest provinces in terms of their national employment shares—experienced the largest absolute reductions in employment with approximately 1.4 million fewer people employed. Gauteng alone accounts for nearly 30% of total jobs lost. In relative terms, however, the Northern Cape, Free State, and Limpopo were hardest hit, with 23%, 17%, and 17% fewer people employed, respectively. We now turn to examine changes in employment by industry and occupation. By sector, while the tertiary sector accounted for most of the total employment decrease (67.1%), this was not unexpected, given that most jobs can be found in this sector (72.2% prior to the pandemic). On the other hand, nearly a third (30.6%) of all jobs lost were in the secondary sectors, which exceed its share of total employment. These job losses were mostly in manufacturing (334,000 jobs lost) and construction (297,000 jobs lost). The primary sectors appear to have been relatively well insulated from the negative employment effects, but still shed over 50,000 jobs. By occupational category, we observe that low- and semi-skilled workers account for almost all jobs lost, with employment levels among high-skilled workers remaining statistically unchanged. Among the semiskilled, shares of total job loss by occupation largely followed prepandemic employment shares. The notable exception is craft workers, who alone accounted for 20% of total employment loss (or 436,000 fewer people employed), despite representing just 12% of the employed prior to the pandemic. Examples of these jobs include individuals working as bricklayers and stonemasons, motor vehicle mechanics, and building electricians. Among low-skilled occupations, one in every four (or 250,000) domestic workers lost their jobs, accounting for 11.2% of total employment loss despite representing just 6% of the pre-pandemic employed. More than half a million (530,000) other less-skilled workers lost

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their jobs, including farm laborers, manufacturing laborers, helpers and cleaners in offices and hotels, and street food vendors (Table 6.4). Considering the intensive margin, just as the distribution of job loss has been uneven, so too has the distribution of working hours among those who remained employed. Table 6.5 highlights substantial betweengroup variation in mean weekly working hours from 2020Q1–2020Q2. All included groups experienced a reduction in working hours on average. In particular, workers who were older (55–64 years), Colored, women, and those whose highest level of education was primary or less exhibited the most severe reductions ranging from 19%–22%.

Multivariate Analysis: Estimating the Probabilities of Transitions in Labor Market States The inability for many to participate in the labor market due to the lockdown policy resulted in many of the previously employed and jobseekers to shift into inactivity. By exploiting the longitudinal nature of the 2020 QLFS data due to the change in survey mode, we examine the conditional correlates of transitioning into various labor market states. That is, we ask: who was more or less likely to become (i) unemployed after being employed, (ii) economically inactive after being employed, and (iii) economically inactive after being unemployed?3 To do so, we generate the three relevant dependent variables and then use ordinary least squares (OLS) to estimate multivariate linear probability models (LPMs) by regressing these dependent variables on a vector of covariates. These covariates include a wide array of demographic and labor market variables. Several results stand out: Individuals employed in the informal sector were significantly more likely to become unemployed, whereas those less likely to experience such a transition include women, older individuals, White relative to African/Black individuals, those living in KwaZuluNatal and Mpumalanga relative to the Western Cape, and those whose contract is of a permanent nature. We observe no significant variation in the probability of transitioning from employment to unemployment by industry or occupation. Notably, those working in the public sector were significantly less likely to transition from employment to either unemployment or inactivity. Considering the latter transition, women were more likely to become inactive after being employed (as opposed to becoming

3 We use the official (searching) definition of unemployment here.

1,172,236 799,033 373,203 2,634,571 1,455,825 112,926 1,065,820 10,314,562 2,946,463 884,683 2,234,281 3,243,976 1,005,159 14,121,369 2,360,096 1,287,769 1,072,327

2,367,575 1,527,944 839,631

2020Q2

1,223,144 842,062 381,082 3,303,486 1,789 388 151,339 1,362,759 11,780,270 3,428,621 982,502 2,495,239 3,622,492 1,251,416 16,306,900

2019Q2

−4.2 −5.1 −2.1 −20.2 −18.6 −25.4 −21.8 −12.4 −14.1 −10.0 −10.5 −10.4 −19.7 −13.4 −0.3 −15.7 27.7

−7,479 −240,175 232,696

%

−50,908 −43,029 −7,879 −668,915 −333,564 −38,412 −296,939 −1,465,709 −482,158 −97,819 −260,958 −378,517 −246,256 −2,185 531

Absolute

Change

14.5 9.4 5.1

7.5 5.2 2.3 20.3 11.0 0.9 8.4 72.2 21.0 6.0 15.3 22.2 7.7 100.0

2019Q2

Employment shares (%)

Year-on-year changes in employment by main industry and occupation

Industry Primary Agriculture, etc. Mining and quarrying Secondary Manufacturing Utilities Construction Tertiary Trade TSC Finance CSP Private households Total Occupation High-skilled Legislators Professionals

Table 6.4

16.8 9.1 7.6

8.3 5.7 2.6 18.7 10.3 0.8 7.5 73.0 20.9 6.3 15.8 23.0 7.1 100.0

2020Q2

0.3 10.8 − 10.5

2.3 2.0 0.4 30.6 15.3 1.8 13.6 67.1 22.1 4.5 11.9 17.3 11.3 100.0

Share of change (%)

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9,228,963 1,436,393 1,708,008 2,687,359 53,782 1,957,006 1,386,415 4,715,050 3,720,516 994,535 16,311,588

7,790,407 1,213,133 1,470,386 2,301,782 67,454 1,520,915 1,216,737 3,935,253 3,190,566 744,687 14,085,756

2020Q2 % −15.6 −15.5 −13.9 −14.3 25.4 −22.3 −12.2 −16.5 −14.2 −25.1 −13.6

Absolute −1,438,556 −223,259 −237,622 −385,577 13,671 −436,091 −169,678 −779,797 −529,950 −249,847 −2,225,832

Change

56.6 8.8 10.5 16.5 0.3 12.0 8.5 28.9 22.8 6.1 100.0

2019Q2

Employment shares (%)

55.3 8.6 10.4 16.3 0.5 10.8 8.6 27.9 22.7 5.3 100.0

2020Q2 64.6 10.0 10.7 17.3 − 0.6 19.6 7.6 35.0 23.8 11.2 100.0

Share of change (%)

Source QLFS 2019Q2 and 2020Q2 (StatsSA). Authors’ own calculations Notes [1] Sample restricted to working-age population (15 to 64 years). [2] All estimates weighted using relevant sampling weights. [3] Industry and occupation totals do not sum because sample here excludes workers in “Other” industries and occupations

Semi-skilled Technical professionals Clerks Service workers Skilled agriculture Craft Plant and machine operators Low-skilled Elementary occupations Domestic workers Total

2019Q2

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42.65 40.44 43.69 41.56

44.36 39.77

43.35 42.41 40.28

Race African/Black

Colored

Indian/Asian

White

Gender Male

Female

Age group 15–34

35–54

55–64

Education

42.34

0.95

1.00

1.02

0.94

1.05

0.98

1.03

0.96

1.01

1.00

32.69

35.41

35.99

31.74

37.64

35.90

37.67

31.72

35.26

35.06

Mean

Mean

Relative to total

2020Q2

2020Q1

0.93

1.01

1.03

0.91

1.07

1.02

1.07

0.90

1.01

1.00

Relative to total

Mean weekly working hours by demographic group, 2020Q1–2020Q2

Total

Table 6.5

−7.59

−7.00

−7.36

−8.03

−6.72

−5.66

−6.02

−8.72

− 16.97 − 16.52 − 18.85

− 15.15 − 20.19

− 17.33 − 21.57 − 13.78 − 13.63

− 17.17

−7.27 −7.39

%

Absolute

Change

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42.74 43.38 40.71

42.32 42.40

Secondary incomplete

Secondary complete (matric)

Post-secondary

Geography Urban

Rural or traditional area

1.00

1.00

0.96

1.02

1.01

0.97

35.04

35.07

33.52

36.40

35.51

32.88

1.00

1.00

0.96

1.04

1.01

0.94

Relative to total

Source QLFS 2020Q1 and 2020Q2 (StatsSA). Author’s own calculations Notes [1] All estimates weighted using relevant sampling weights. [2] Sample restricted to the working-aged (15–64 years)

41.07

Primary or less

Mean

Mean

Relative to total

2020Q2

2020Q1

−7.36

−7.24

−7.18

−6.99

− 17.12 − 17.36

− 19.96 − 16.92 − 16.10 − 17.65

−8.20 −7.23

%

Absolute

Change

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unemployed, as observed above), in addition to those with less than a complete secondary education, those living in Limpopo relative to the Western Cape, union non-members, and those with verbal employment contracts. Youth were also more likely to experience an employmentinactivity transition relative to older individuals. Moreover, our estimates suggest substantial heterogeneity in this transition by industry and occupation. Lastly, relative to the Western Cape, individuals living in any province other than Gauteng and the Eastern Cape were more likely to become inactive after being unemployed. Again, the youth were also more likely to experience this transition.

Conclusion South Africa imposed a quick, relatively stringent national lockdown in response to the COVID-19 pandemic to prepare the necessary health infrastructure, as well as to delay and minimize the spread of the virus. Although the pandemic continues to pose important risks to public health, the lockdown was always expected to result in substantial shortand long-term economic costs. Several studies using data collected during South Africa’s lockdown show that these costs have been disproportionately borne by several vulnerable groups, such as less-skilled, low-wage, informal, and female workers. In this paper, we make use of nationally representative labor force data to conduct a descriptive, empirical analysis on both aggregate and between-group variation in labor market outcomes over time on both the extensive and intensive margins to obtain an indepth and nuanced overview of how the pandemic affected the South African labor market in the short-term. Our analysis shows that, of the 2.2 million fewer individuals employed in the first few months of the lockdown, employment loss was concentrated among the youth, those with lower levels of formal education, and those living in urban areas. Considering labor market characteristics, almost all employment loss was observed in the private sector, with the lockdown disproportionately affecting individuals working in the informal sector. Specifically, about 50% of total employment loss is attributable to the informal and domestic services sector, despite these workers accounting for just under 25% of pre-pandemic employment. We also observe suggestive evidence of job protection among union members and workers in the public sector. Although the tertiary sector accounted for two-thirds of employment loss, the secondary sector—particularly

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manufacturing and construction—was affected disproportionately. Lowand semi-skilled workers accounted for almost all jobs lost. Geographically, after accounting for national employment shares, we observe that the Northern Cape, Free State, and Limpopo suffered the largest relative employment losses. Considering outcomes other than employment, we document the notable changes in the distribution of working hours, and the substantial increase in inactivity. This latter observation is characteristic of the national lockdown policy, which induced an inability for both job-losers and jobseekers to engage in the labor market. Although the COVID-19 pandemic and subsequent national lockdown have had a substantially adverse effect on the South African labor market, given data availability at the time of writing, it is important to note that our analysis presented here serves as a set of estimates of short-term effects. As more data is released, we can investigate effects on alternative labor market outcomes other than employment in greater depth, particularly that of wages. Availability of this data will also permit us to examine heterogeneity in effects across the wage distribution—a critical aspect to consider given the potential of the pandemic to exacerbate the country’s already extreme levels of income inequality. Notably, there is much scope for more analysis to be done which exploits the novel longitudinal nature of the 2020 QLFS data. Ultimately, more data will give us new information on the extent and distribution of recovery in the labor market and, unfortunately, the scale of permanent job destruction across the South African economy.

References Benhura, M., and P. Magejo. 2020. Differences between formal and informal workers’ outcomes during the COVID-19 crisis lockdown in South Africa. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDSCRAM) Policy Paper 2. https://cramsurvey.org/wp-content/uploads/ 2020/09/2.-Benhura-M.-_-Magejo-P.-2020-Differences-between-formaland-informal-workers%E2%80%99-outcomes-during-the-COVID-19-crisis-loc kdown-in-South-Africa.pdf.. Bhorat, H., T. Köhler, M. Oosthuizen, B. Stanwix, F. Steenkamp, and A. Thornton. 2020. The economics of Covid-19 in South Africa: Early impressions. Development Policy Research Unit Working Paper 202004, DPRU, University of Cape Town, Cape Town. Casale, D., and D. Posel. 2020. Gender and the early effects of the Covid-19 crisis in the paid and unpaid economies in South Africa. National Income

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Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 4. https://cramsurvey.org/wp-content/uploads/2020/07/Cas ale-Gender-the-early-effects-of-the-COVID-19-crisis-in-the-paid-unpaid-eco nomies-in-South-Africa.pdf. Casale, D., and D. Shepherd. 2020. The gendered effects of the ongoing Lockdown AND SCHOOL closures in South Africa: Evidence from NIDSCRAM waves 1 and 2. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 5. https://cramsurvey.org/ wp-content/uploads/2020/09/5.-Casale-D.-_-Shepherd-D..-2020-The-gen dered-effects-of-the-ongoing-lockdown-and-school-closures-in-South-AfricaEvidence-from-NIDS-CRAM-Waves-1-and-2.pdf. Espi, G., M. Leibbrandt, and V. Ranchhod. 2020. The relationship between employment history and COVID-19 employment outcomes in South Africa. Policy Paper No. 6, National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM). https://cramsurvey.org/wp-content/upl oads/2020/09/6.-Espi-G.-Leibbrandt-M.-_-Ranchhod-V.-2020-The-rel ationship-between-employment-history-and-COVID-19-employment-out comes-in-South-Africa.pdf. Francis, D., K. Ramburuth-Hurt, and I. Valodia. 2020. Estimates of Employment in South Africa under the five-level lockdown framework. SCIS Working Paper No. 4, Southern Centre for Inequality Studies, University of the Witwatersrand, Johannesburg. Gustaffson, M. 2020. How does South Africa’s Covid-19 response compare globally? A preliminary analysis using the new OxCGRT dataset. Stellenbosch Economic Working Paper WP07/2020, Department of Economics, Stellenbosch University, Stellenbosch. Hill, R., and T. Köhler. 2020. Mind the gap: Analysing the effects of South Africa’s national lockdown on gender wage inequality. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 7. https://cramsurvey.org/wp-content/uploads/2020/09/7.Hill-R.-_-Ko%CC%88hler-T.-2020-Mind-the-gap-Analysing-the-effects-ofSouth-Africa%E2%80%99s-national-lockdown-on-gender-wage-inequality.pdf. International Labour Organization (ILO). 2020. ILO monitor: COVID-19 and the world of work, 6th ed. https://www.ilo.org/wcmsp5/groups/public/--dgreports/---dcomm/documents/briefingnote/wcms_755910.pdf. Jain, R., J. Budlender, R. Zizzamia, and B. Ihsaan. 2020. The labour market and poverty impacts of Covid-19 in South Africa. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 5. https://cramsurvey.org/wp-content/uploads/2020/07/Jain-The-labourmarket-and-poverty-impacts.pdf. Köhler, T., and H. Bhorat. 2020. COVID-19, social protection, and the labour market in South Africa: Are social grants being targeted at the most

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vulnerable? National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 6. http://www.dpru.uct.ac.za/ sites/default/files/image_tool/images/36/News_articles/Kohler%20and% 20Bhorat%20NIDS%20CRAM%20WP6_July2020.pdf. Ranchhod, V., and R. Daniels. 2020. Labour market dynamics in South Africa in the time of Covid-19: Evidence from wave 1 of the NIDS-CRAM survey. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper No. 9. https://cramsurvey.org/wp-content/upl oads/2020/07/Ranchhod-Labour-market-dynamics-in-the-time-of-COVID19..pdf. Statistics South Africa (StatsSA). 2019. Quarterly labour force survey 2019: Q2. Version 1. Pretoria: Statistics South Africa [producer]. Cape Town: DataFirst [distributor]. https://doi.org/10.25828/vkhb-2j69. Statistics South Africa (StatsSA). 2020a. Quarterly labour force survey 2020a: Q1. Version 1. Pretoria: Statistics South Africa [producer]. Cape Town: DataFirst [distributor]. https://doi.org/10.25828/vkhb-2j69. Statistics South Africa (StatsSA). 2020b. Quarterly labour force survey 2020b: Q2. Version 1. Pretoria: Statistics South Africa [producer]. Cape Town: DataFirst [distributor]. https://doi.org/10.25828/vkhb-2j69. Visagie, J., and I. Turok. 2020. The uneven geography of the COVID-19 crisis. National Income Dynamics Study Coronavirus Rapid Mobile Survey (NIDS-CRAM) Policy Paper 14. https://cramsurvey.org/wp-content/upl oads/2020/09/14.-Visagie-J.-_-Turok-I.-2020-The-uneven-geography-ofthe-COVID-19-crisis.pdf.

CHAPTER 7

Social Security and Social Protection in South Africa Alex van den Heever

Introduction This chapter examines the rationale for an overhaul of the system of social security in South Africa taking account of long-term social and economic factors and what has been highlighted by the COVID-19 pandemic. Social security systems have evolved globally as a principalcorrective to the distributional forces of market economies and other forms of private action. While markets and self-organization of various forms are central to the healthy functioning of modern societies, they routinely generate harmful external effects. On the positive side, markets and self-organization reward innovation and enterprise. On the negative side, they can institutionalize structural winners and losers in society with resulting unfair distributions of social

A. van den Heever (B) Social Security Systems Administration and Management, Wits School of Governance, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_7

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risk, incomes, and assets. If not addressed, the resulting social harms become embedded within the social fabric. As a response, social security systems are society-wide mechanisms that institutionalize countervailing distributions of risk and income that ensure a balanced relationship between society and the economy. The result is a healthier and more resilient society and economy. Some of these points are argued by Gumata in Chapter 5 in her discussion of appropriate fiscal policy instruments to respond to the inadequacy of social security provisions under the conditions of COVID-19 pandemic and economic crisis it induced. Economies with fair distributional rules outperform those that encourage predatory (economic) conduct with unfair outcomes. Which set of rules are adopted is ultimately a policy choice, affected by technical considerations, politics, and context. Unfair outcomes, put simply, reflect the choices of governments. To date, South Africa and the region have arguably given strong preference to exclusionary forms of economic development, whether through markets or poor public governance. As a result, both South Africa and the region are characterized by social segmentation that is structural in nature. These therefore reflect the policy choices made to date. This chapter focuses on two main themes: the first summarizes the adequacy of the social security system. The second is a substantive review of the architecture of social security system and its administration. What Has the COVID-19 Pandemic Revealed? While the prevailing levels of income and wealth in South Africa and the region create the impression of advanced development and economic diversity, in reality the economic and social fabric appears fragile and struggles to withstand major social and economic shocks. The scale of the COVID-19 pandemic and government’s response to it has however exposed the extent of this fragility. Two weaknesses in the response stand out. The first is with respect to the introduction of a lockdown to suppress transmission of the SARSCOV-2 virus. The hard lockdown at the beginning of the pandemic exhibited an incapacity on the part of the government to rapidly implement less economically harmful non-pharmaceutical interventions to suppress the epidemic. This demonstrates weaknesses within the public

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health system. Chapter 3 sets out some of the broad state capacity weaknesses in South Africa. The second weakness lies in how the lockdown in South Africa revealed that government lacked the social security machinery to provide interim emergency support to keep people employed or to offer income support to people who instantly lost work and sources of income. This chapter focuses on the latter concern. While it could be argued that many countries were surprised by the pandemic, South Africa and the region had several months to prepare for the effects of the pandemic. The failure to best use the available time suggests the important weaknesses in the structures of the state. However, it is the poor social security response that deserves special consideration. An important point to underline is that South Africa lacks a comprehensive social security system. As a consequence, the COVID-19 response failed in the following crucial respects: First, not one of South Africa’s social security agencies or organizations has a registry of households and their socioeconomic situation. For instance, the Unemployment Insurance Fund (UIF) and the Compensation Fund (CF) have no information on contributors, only beneficiaries. This is a severe limitation. It is essential that the government implements support measures to keep employees in their jobs, or to provide temporary relief. In addition, the government should put in place registration processes that do not just cover beneficiaries but also contributors. Unfortunately for many businesses, the wait was too long at the height of the pandemic, resulting in employment terminations and business closures that had severe effect on laid off workers. The South African Social Security Agency (SASSA) also only maintains a registry of beneficiaries, and has no system to prospectively collect information on households that may require income support either now or in future. The implementation of a special COVID grant consequently ran into the same registration difficulties as the UIF and the CF. The support measure was made available, but the systems were not up to the task to deliver it. Second, the institutional integrity of the social security system is deeply fragmented and poorly governed. The UIF and CF are effectively departmental sub-structures that operate without independent supervision. Similar weaknesses apply to SASSA. It is highly probable that the governance regime for social security agencies has impeded their progress into well-functioning social protection organizations. In all instances,

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administrative structures are outdated and there is no apparent innovation to improve benefits or the quality of services. The configuration of social security arrangements largely predate 1994 and appear resilient to reform. Third, the social security departments and associated agencies operate in silos, with a well-entrenched inability to coordinate and integrate responses with related public services and economic actors. For instance, unemployment interventions have to date been limited to basic forms of unemployment insurance. By way of contrast, many countries integrate all forms of social protection with active labor market strategies (Ozkan 2014). The linkage between social protection and labor market strategies is well-developed by Gumata in Chapter 5. Definition of Social Security and Social Protection The terms social security and social protection are often used interchangeably, although what they refer to is well understood (Cichon et al. 2004). Within the South African context, the Taylor Committee (2002) and the Department of Social Development (DSD) (2017) use the term social protection to refer to a wide group of contingencies that both prevent and mitigate social harm, with social security referring to a narrower set of contingencies typically addressed through income protection schemes. The rationale for the distinction has an institutional justification (van den Heever 2011) with the term social security applicable to a package of interventions that are closely related in terms of policy development and delivery for technical reasons. While the term social protection could refer to interventions such as basic education, health care, free basic utilities, social assistance, and social insurance, on the one hand, the term social security, as used in this chapter, refers only to income protection-related contingencies best addressed through social assistance and social insurance, on the other hand. This conception is consistent with Section 27 of the Bill of Rights which specifically refers to social security and social assistance as a form of social security (discussed further in Sect. 5) with other social protection benefits mentioned elsewhere (for instance health care, shelter, and education). The term social security as used in South Africa is therefore understood narrowly, although the adoption of this understanding has not as yet translated into substantial reform of the system of social security. Hopefully, this chapter clears the conceptual muddle around social security and

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social protection. A starting point will be the Constitution and the Bill of Rights in particular, which the next section evaluates. The Bill of Rights and Its Implications Section 27 of the South African Bill of Rights provides for a set of positive and negative rights relating to health care, food and water, and social security. Despite this, the obligations of Government to deliver on these rights has not been fully laid out in the form of legislation and institutional frameworks. While jurisprudence has provided guidance in relation to very specific rights, rights-based approaches to deepening the social security system, although important, have to date proven to be quite limited, precisely because governance and state capacity play a pivotal role in bolstering a social security system. Box 1: Section 27 of the Bill of Rights—The right to health care, food, water, and social security 1. Everyone has the right to have access to a. health care services, including reproductive health care; b. sufficient food and water; and c. social security, including, if they are unable to support themselves and their dependants, appropriate social assistance. 2. The state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of each of these rights. 3. No one may be refused emergency medical treatment. (Republic of South Africa 1996)

Box 2: Section 36 of the Bill of Rights—Constraints on the limitation of rights 1. The rights in the Bill of Rights may be limited only in terms of laws of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors, including a. the nature of the right;

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b. c. d. e.

HEEVER

the importance of the purpose of the limitation; the nature and extent of the limitation; the relation between the limitation and its purpose; and less restrictive means to achieve the purpose

2. Except as provided in subsection (1) or in any other provision of the Constitution, no law may limit any right entrenched in the Bill of Rights (Republic of South Africa 1996)

Section 27 provides a right to social security for “everyone.” This includes the right to access “social assistance” if “they” are unable to support “themselves” and “their dependants.” Five considerations arise from this subsection: First, the term “social assistance” refers to what other countries call “cash grants” or “social transfers.” The term “social assistance” is used conventionally in South Africa and refers to non-contributory benefits in the form of income transfers where the entitlements do not flow from, or relate in any way (as in the value of an entitlement), to a contribution. Second, despite referring to “everyone,” subsection (c) makes an implicit distinction between sub-categories of “everyone.” The reference to those “unable to support themselves” identifies a sub-group of “everyone” with inadequate incomes. It further suggests that dependants of this sub-category are a further sub-category of “everyone.” By implication, subsection (c) recognizes that a mix of social insurance and social assistance is needed to ensure universal coverage across the full income spectrum of households. Third, the term “social security” by default refers to contributory forms of social security (social insurance) for people with adequate incomes, as this explains the express qualification that the term includes non-contributory coverage (social assistance) for those without adequate incomes. Simply put, subsection (c) indicates that everyone in households with adequate incomes have a right to social insurance (contributory social security), and everyone in households without adequate incomes have a right to “appropriate” non-contributory income protection (social assistance). Fourth, Section 27(2) places an obligation on the state to implement reasonable measures to achieve the positive rights. The qualification,

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which limits these rights, requires that account must be taken of available resources. This limit is itself qualified by the requirement to achieve “progressive realisation” of the rights. A short-term fiscal constraint cannot therefore result in a permanent and long-standing limit to these rights. Section 36 further constrains the resource qualification by requiring that any limitation on any right conferred by the Bill of Rights requires a law of general application which must be “reasonable” and “justifiable” within the requirements of an “open and democratic society.” Section 36 therefore qualifies the right of the state to limit any right contained in the Bill of Rights, which right cannot be exercised in an arbitrary manner. Despite the existence of the Bill of Rights, finalized in 1996, no system of social security has been conceptualized or implemented through government processes, which is a deficiency in governance. There is also presently no official definition of social security that can guide the country’s understanding of the right or the design of the institutional framework. The Bill of Rights has to date therefore not been given life through legislative and other measures. Despite the justiciability of the rights outlined in the Bill of Rights, the question is how to enforce these rights (Budlander 2003; Constitutional Court of South Africa 2000) especially in the face of the state’s failure to comply with its obligations. Taking account of Section 27(2) of the Bill of Rights, the obligation of the state has three elements. First, in processes consistent with an open and democratic society, the state must develop a definition of social security, as well as signal the complete right to social security. Second, the state must provide data, information, and reports clarifying the status of the right to social security at any given time. Third, the state must provide a reform program developed using processes consistent with an open and democratic society that demonstrates how the right to social security will be realized over time. This program should also clarify which rights are subject to resource constraints, and must therefore be progressively realized, and which are not subject to resource constraints, and must therefore be made available immediately. It is worth considering the set of interventions that are required to fully realize social security arrangements, which the next section turns to.

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Progressive Realization Versus Immediate Availability Social security arrangements involve two basic interventions, social insurance, and social assistance. Social insurance is contributory with benefit entitlements that flow from a contribution and involve an element of risk (for the contingencies they cover). Social assistance benefits are noncontributory and are therefore state-subsidized benefits in the form of income transfers for specified contingencies. An entitlement to these benefits does not flow from a contribution and is instead based on need as legislated. While the generosity of social assistance is constrained by the funds that can be raised through general taxes, social insurance benefits are predominantly earnings-related and funded through contributions directly or indirectly paid by the potential beneficiary.1 In the case of the social assistance, therefore, the obligation of the state is to provide an institutional framework to deliver social assistance as well as to determine, finance, and make available the benefits. With social insurance, government only needs to determine the institutional framework as the benefits are self-funded.2 Without this institutional framework, however, social insurance would not be possible if reliance is placed exclusively on the incomplete protection available from private insurance (Barr 2012; Cichon et al. 2004; van den Heever 2021). While social assistance is subject to resource constraints, social insurance is not and should be realizable immediately. In summary, social security policy as embodied in the current framework has not referenced the Bill of Rights. First, no definition of social security exists. Second, no elaboration of the complete right to social security exists. Third, the rights that are subject to resource constraints lack a progressive realization pathway. Fourth, there is no clarification of which rights to social security are not subject to resource constraints such as access to social insurance and robust institutional frameworks for their

1 These can involve co-contributions by an income earner, an employer, and even government. The contribution would be proportional to income, with benefits that can also vary to a degree by income. 2 This is consistent with the Constitutional Court’s understanding that a distinction

should be made between the right of “access to adequate housing” and the right “to adequate housing.” Whereas the latter may refer to an obligation to provide housing, the former requires that the enabling conditions be established for people to buy their own houses. “The state must create the conditions for access to adequate housing for people at all economic levels of society” (Constitutional Court of South Africa 2000, par 35).

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delivery. These gaps in the state’s obligations exist despite the finalization of the Bill of Rights as far back as 1996. Adequacy of Social Security in South Africa Inequality and Redistribution Poverty and inequality are recognized as distinct concepts although they share a common cause. Poverty can be regarded as a manifestation of severe inequality, with poverty understood to refer to an absence of the means to survive with decency. Many measures of poverty are largely measures of inequality. A common approach sees poverty in relative terms, as about context, and with a strong subjective element. In many cases, financial measures are based on some deviation from mean income. Following this approach, the more even the distribution of income, the lower the levels of poverty. Poverty line approaches, however, see poverty as an absolute lack of some or other objectively determined package of goods and services necessary for basic survival. People falling below this line are assumed to be in a state of absolute poverty. These different approaches however may lead to different policy choices. Where the policy focus is on measures of absolute poverty, the causes of inequality may drop from view. But poverty is multidimensional and not reducible to simple income-related measures (Vijaya et al. 2014). To the extent that severe levels of inequality are structural and flow from the organization of institutions, including markets, poverty-focused strategies may leave inequality-inducing institutions intact that result in poverty. Such policies also tend to address quite limited features of poverty, leaving many highly distressed households without adequate support or protection where they fall outside the official definition. Alternatives to poverty line approaches use measures that close the gap between mere survival and the minimum requirement to live decently (Frye et al. 2018). This offers more opportunity for fundamental policy approaches that address both the causes of multidimensional poverty and inequality. The concept of inequality as a distinct area of concern however requires a reference point. Complete equality can reasonably be regarded as unattainable as differences in income are not always unjust. For instance, the reward for differential effort and task complexity may result in differences in income that could be regarded as fair. Differences in private earnings are,

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however, not always related to effort when excessive. These include inheritances, inter-household transfers, and earnings from accumulated assets. Where earnings begin to deviate substantially from productive contributions to society, the result can be a deterioration in social cohesion and economic coherence. South Africa is one of the most unequal societies in the world (Finn et al. 2014; Hundenborn et al. 2016). The causes are however contested, with policies implemented from 1994 unable to avoid a worsening of inequality and unemployment (Wittenberg 2017). The competing views on inequality can be broadly divided into two theses. The first, encapsulated in South Africa’s National Development Plan (NDP) (National Planning Commission 2011), argues that inequality results from high levels of unemployment due to weak economic growth. Therefore, the only way to address inequality is to grow the economy first and employ more people. This view places weight on the distribution of income through employment. It largely ignores the distribution of income through asset ownership and limits income through redistribution to some measure of a poverty line. The second, consistent with emerging evidence, argues that inequality is an inevitable outcome of any market economy and private activity in the absence of countervailing institutionalized systems of income redistribution (Hoeller et al. 2012; OECD 2015; Ostry et al. 2014). The influence of post-tax income redistribution can influence the shape and form of an economy over time with the potential to diversify an economy. The latter view is gathering weight as the dominant perspective, although not well respected in policy designs outside of the most industrialized countries. Data reflecting the pre- and post-tax Gini coefficients compiled by the Organisation for Economic Co-operation and Development (OECD) (2020) for member countries suggests that, in the absence of redistributive programs, inequality in all OECD countries would converge on South Africa’s outcomes irrespective of the level of development. This demonstrates that policy choices matter. Redistributive programs typically take the form of subsidized services that de-commodify key social needs such as health care, education, basic housing, and social security schemes which protect household incomes through insurance and subsidies of various forms. In the absence of these interventions incomes, assets and the economy become concentrated. The resulting distortions structurally destabilize balanced economic development and social conditions. A strong case can therefore be made that

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South Africa’s inequality outcomes are themselves the drivers of weak economic growth and structural unemployment. The absence of a system of social security as a key institutionalized stabilizer of incomes appears to lie at the heart of South Africa’s social and economic distortions. Comprehensive social security systems largely address contingencies closely tied to life-cycle risks. To be comprehensive, each part of the life cycle must be protected through measures that both prevent and/or mitigate the contingency. Children are protected through having households that are stable and have access to decent incomes and shelter. Further, working age adults are protected from contingencies that result in the loss of earnings from employment due to injuries, illness, death, disability, and unemployment. In addition, people in old age are protected through access to pension incomes. Where the measures are sufficiently comprehensive, they will address poverty and inequality, with each contingency directly or indirectly affecting these outcomes. Poverty and inequality can therefore be regarded as outcomes of incomplete systems of social protection rather than contingencies in and of themselves. The protection of incomes afforded by comprehensive social protection systems forms a substantial part of this protection. It is therefore important to take a closer look at the precise gaps in protection. The next chapter pays attention to this deficiency. Gaps in Protection Overview While structural inequality and unemployment appear broadly related to distributional factors (income and assets) as discussed above, many forms of social protection are categorical in nature and focus on the prevention and mitigation of specific contingencies. Categorical approaches to social protection are criticized by observers for being so specific that important contingencies and important social outcomes such as inequality and poverty are poorly addressed. Comprehensive approaches attempt to address all important categories of risk through combining targeted categorical programs and schemes with less targeted approaches. As a package, the chosen set of measures should be designed to structurally address social outcomes such as inequality and poverty. South Africa’s social security system is however highly targeted in two ways.

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First, social protection regimes are restricted to a limited range of contingencies. Second, many redistributive programs make use of restrictive means tests which result in errors of exclusion and costly administration. Targeting may lead to segmentation with a structural separation of support for lower-income households from those who are better off. Highly targeted, or residual social security systems, reinforce inequality (Mkandawire 2005). Social protection regimes are composed of measures that both structurally redistribute income and provide insurance protection. The latter preserves livelihoods and opportunities in the face of adversity. The former redistributes income while also mitigating the effects of particular contingencies. On its own, therefore, social insurance does not de-segment society. For this to happen, the combined influence of income redistribution and insurance is necessary. Broadly speaking, South Africa’s social security system is characterized by redistributive schemes that exclude many vulnerable households and social insurance that is insufficiently comprehensive (Taylor Committee 2002). The former leaves many households in extreme hardship while the latter fails to protect income earners from important social contingencies. Social insurance schemes are furthermore not harmonized with social assistance programs as the policy processes are driven by different ministries with limited coordination (see discussion in Sect. 6.4). While social assistance expenditure expanded by around 1.5% of GDP from 2002, this was largely limited to the expansion of the Child Support Grant (CSG), which provides income support in respect of individual children valued roughly at the food poverty line for children. Caregiver support has only recently been considered during the COVID-19 crisis as a temporary measure. Aside from this expansion, no substantive improvement in any part of the social security system has been implemented after the Taylor Committee of Inquiry in 2002. Formal and Informal Social Protection A distinction is also made between formal and informal forms of social protection. The former refers to systems with statutory guarantees of some form or another while the latter refers to arrangements established by some form of private agreement (Department of Social Development 2017). Together both formal and informal social security expenditure

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trends to around 30% of GDP (Cichon et al. 2004), referred to as the “normal” level of social security expenditure. The comprehensiveness of social security systems is largely determined by the proportion of normal social security expenditure that is formal, i.e., subject to some form of rights-based guarantee, versus informal where the quality of protection is less reliable or complete. Comprehensiveness is therefore not characterized by high levels of absolute social security expenditure beyond what is regarded as normal. Instead, it is emphasizes the scope of protection within what is considered normal. Social assistance and social insurance schemes form part of the formal system, while private schemes are informal. The complete quantification of informal social security would include inter- and intra-household transfers. The simpler approach is to focus on private contractual arrangements in the formal economy. When this approach is used, South Africa spends 15.7% of GDP (up from 13.5% in 2000) on social security with only 7.9% of GDP on formal social security (up from 7.8% of GDP in 2000) (Table 7.1). Virtually, all contributory old age, death, disability, and health care expenditures are regarded as informal (noting that there are some limited social guarantees for medical schemes), and offer limited certainty of protection. At 7.6% of GDP in 2018, the social security system is far from comprehensive with most (53.9%) of the formal expenditure attributable to the public health system (4.1% of GDP). The remainder involves social assistance (2.9% of GDP) and social insurance (0.6% of GDP) (Wits School of Governance 2020). Protection of Households and Children While social assistance is offered for children, and foster care, the benefits have not been designed as a form of household support. The child benefits do not account for the financial needs of the caregiver and the foster care benefits are difficult to access (as the grant is only paid out once a social worker has assessed the foster parents and the courts have approved) and stops when a child is adopted. Means tested social assistance for old age is however considered to have contributed substantially to the reduction of poverty in South Africa, particularly of women who constitute up to two-thirds of recipients (Burns et al. 2005). The value of the grant is fairly generous and offers indirect support to households beyond the primary beneficiaries. Many

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Table 7.1 Overview of social security expenditure in South Africa for 2000 and 2018 Contingency

2000 Formal

Health Illness Old age Invalidity/disability Loss of support Maternity Children Foster care/Adoption Household protection Unemployment TOTAL Non-contributory Contributory public Contributory private Health Illness Old age Invalidity/disability Loss of support Maternity Children Foster care/Adoption Household protection Unemployment TOTAL Non-contributory Contributory public Contributory private

2018 Informal

Total

Expenditure (2018 prices) 80 259 84 471 164 730 441 0 441 25 885 63 104 88 989 17 266 33 558 50 824 807 28 116 28 923 1 268 0 1 268 11 609 0 11 609 2 063 0 2 063 7 058 0 7 058 4 291 0 4 291 150 947 209 248 360 195 131 537 0 131 537 19 410 0 19 410 0 209 248 209 248 Expenditure (% of GDP) 3.0% 3.2% 6.2% 0.0% 0.0% 0.0% 1.0% 2.4% 3.3% 0.6% 1.3% 1.9% 0.0% 1.1% 1.1% 0.0% 0.0% 0.0% 0.4% 0.0% 0.4% 0.1% 0.0% 0.1% 0.3% 0.0% 0.3% 0.2% 0.0% 0.2% 5.6% 7.8% 13.5% 4.9% 0.0% 4.9% 0.7% 0.0% 0.7% 0.0% 7.8% 7.8%

Formal

Informal

Total

203 242 313 70 531 26 090 3 861 1 040 60 631 5 475 10 668 7 531 389 382 356 982 32 400 0

193 389 0 68 885 71 422 60 449 0 0 0 0 0 394 145 0 0 394 145

396 631 313 139 416 97 512 64 310 1 040 60 631 5 475 10 668 7 531 783 528 356 982 32 400 394 145

4.1% 0.0% 1.4% 0.5% 0.1% 0.0% 1.2% 0.1% 0.2% 0.2% 7.8% 7.1% 0.6% 0.0%

3.9% 0.0% 1.4% 1.4% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% 7.9% 0.0% 0.0% 7.9%

7.9% 0.0% 2.8% 2.0% 1.3% 0.0% 1.2% 0.1% 0.2% 0.2% 15.7% 7.1% 0.6% 7.9%

Source Wits School of Governance (2020)

children and unemployed working age adults depend indirectly on the old age grant. Social assistance for the disabled offers support at the same value as for old age and is also means tested. It is also the only grant directly available to working age adults (note that a temporary social relief of distress grant

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has been allocated to working age adults as a response to COVID-19). Once recipients reach the age of 60, the grant is switched to that for old age. Concerns with the grant involve inconsistencies in the assessments of permanent disability and proper administration (Goldblatt 2009). The disability grant is also responsible for a disproportionate number of annual appeals against the decisions made by the South African Social Security Agency (SASSA) where eligibility has (frequently) been improperly declined (own consultations with the Department of Social Development). Given evidence of the positive social and economic effects of social assistance (Woolard et al. 2011), the present regime appears too limited for the South African context. Required for a more comprehensive system of basic income support are: pregnancy support and support for the first 1000 days of the newborn child (van den Heever 2016); caregivers of child recipients of the child support grant; and basic income support for unemployed adults from the ages of 18 to 59 (discussed further below). Prior to the COVID-19 pandemic, up to 60% of households could be regarded as living in income distress, placing a burden on their household relationships and opportunities (StatsSA 2018). Nearly, two-thirds of all children live in the poorest 40% of households (Hall and Sambu 2016). This number will have increased due to the pandemic. The removal of means tests for social assistance (Taylor Committee 2002) is also seen as important to: eliminate errors of exclusion through improved targeting; address the problematic implications means tests have for the dignity of recipients; and eliminate poverty traps (Samson 2007). While universalization appears to increase the financial outlay for social assistance, this is clawed back through the tax system (Samson 2007). The net financial implications can therefore be designed to achieve fiscal neutrality. Unemployment Despite the existence of high levels of structural unemployment, formal protection for unemployment in the form of social insurance accounts for only 0.2% of GDP (Table 7.1), with no change between 2000 and 2018. Labor activation programs are also not integrated into the system of social security, with no social assistance for unemployment linked to labor activation found in well-developed systems (see Ozkan 2014). While some

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labor activation programs do exist, they are limited in scale and therefore in their ability to impact on structural unemployment. While unemployment insurance in South Africa offers reasonable benefits for up to 12 months, it is limited to contributors and therefore does not offer protection to many informal workers (noting that although domestic workers are covered, compliance and access to benefits is poor), non-contributors and the long-term unemployed. An insurance framework is too limited for the domestic context (in fact for any context) as it cannot address structural unemployment. Resistance to expanded social security for the unemployed focuses on the risk of a dependency culture emerging that could deter normal employment-seeking behavior. Recent research however suggests that strong positive incentives to seek employment exist even where benefits are relatively generous (Howell and Rehm 2009; Surender et al. 2010). A comprehensive approach to unemployment protection should consider an integrated approach to social insurance, social assistance, and labor activation. Labor activation programs typically include job placement, internships, adult skills development, and special employment programs, all of which improve labor mobility and are important to addressing long-term unemployment (Rønsen and Skarðhamar 2009). Labor activation programs should be developed in conjunction with key industries through trade and industry policy. Old Age, Death, and Disability While South Africa has a basic social assistance benefit for old age and disability, these grants do not form part of a holistic social security framework that integrates social assistance arrangements with contributory schemes offering equivalent benefits in the form of social insurance. Contributory protection for retirement, together with the complimentary arrangements for the death or disability of a breadwinner, presently forms part of a tax incentivized quasi-voluntary private system. Contributions to these schemes add up to approximately 4% of GDP (derived from Table 7.1), but offer very limited protection for income earners. Schemes are offered at the discretion of employers, fees are excessive, benefit levels are discretionary and typically too low, and there are no statutorily required benefit guarantees (Department of Social Development 2007b). Well-developed comprehensive social security systems structure their old age protection schemes in three distinct tiers (International Labour Office, UD). First, through a non-contributory basic

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social assistance benefit constituting tier 1. Second, through a mandatory contributory basic earnings-related social insurance arrangement constituting tier 2. Third, through a contributory mandatory (if large) or voluntary (if small) supplementary earnings-related arrangements offered through regulated private schemes constituting tier 3. Presently, South Africa has a version of tier 1 together with a weak version of tier 3. This therefore constitutes a major gap in the protection of income-earning households who risk severe reversals if the contingencies death, disability, and old age occur during periods of inadequate coverage. To address this gap, it will be necessary to constitute a coherent three-tier framework (Inter-departmental task team on social security 2012). Institutional Gaps The present institutional framework for social security in South Africa is largely unchanged from that inherited from the pre-1994 period. Historically, social security was never conceived of as a system, but rather as individual categorical programs addressing very specific needs. The allocation of functions by ministry therefore evolved piecemeal over time. The ministries with important social security functions include the following: ● Finance (National Treasury): which oversees the general budget allocations; collects the social insurance revenues; oversees policy development regarding financial services which affect private contributory pensions, death and disability schemes; and oversees social security investments in the Public Investment Corporation (PIC). ● Social Development: which is responsible for coordinating social security policy; and is directly responsible for policies regarding social assistance and social services. ● Employment and Labor: which is responsible for overseeing the Unemployment Insurance Fund (UIF) and associated policy development; the Compensation Fund (CF) and associated policy development for social insurance coverage for occupational injuries and diseases including loss of income, loss of support, and compensation for medical expenses; and labor activation strategies. ● Health: which is responsible for health policy development; oversight of health service delivery; policies regarding the private health

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system, including medical schemes and their regulation; and the provision of coverage for occupational diseases in mining. Transport: which is responsible for policies regarding third-party insurance for road accidents offered through the Road Accident Fund. Coverage is offered for: loss of income; loss of support (where a breadwinner dies); and compensation for medical expenses all largely on a fault basis (awards are apportioned where individuals are at fault in the accident). Home Affairs, which provides identification documents and a population registry for births and deaths. Justice: which provides the general framework for the enforcement of social security rights; and is responsible for the judicial oversight of assessments for foster care and adoptions. International Relations: which coordinates international and regional social security access for South Africans abroad and travelers to South Africa.

The large number of ministries with some role in making social security policy arguably explains the slow pace of social security reform in South Africa (van den Heever 2011). Lack of coordination in government hampers policy implementation, and even when policies are implemented, their effectiveness is eroded by capacity weaknesses in other parts of government. With so many ministries involved, no single ministry is properly authorized to initiate holistic social security policy processes that cut across ministries. Inter-departmental coordination of policy appraisals and consultation is severely compromised. Social security delivery is also complicated by a multiplicity of small agencies and private actors, each of which fall under different policy jurisdictions and a wide range of shallow corporate governance arrangements. These arrangements influence administrative performance in the public interest including the risk of corruption. Such concerns were originally voiced by the Taylor Committee of Inquiry (Taylor Committee 2002) which recommended a consolidation of ministries and agencies together with a consolidated array of agencies reporting to an independent social security board. More recently, an inter-departmental process on social security convened within government re-asserted these concerns together with recommendations for a

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streamlined framework (Inter-departmental Task Team on Social Security 2012). The complicated array of delivery agents for social security also constrains opportunities for efficient transversal functions, such as public interfaces, assessment regimes, registries (all of which are different for each scheme). Revenue arrangements are also specific to each social insurance scheme, each of which has a separate balance sheet. Some schemes run up very large surpluses (UIF and CF) while others experience large deficits (RAF). This poorly articulated framework resulted in the many delays and failures to direct social protection transfers of various forms to households and workers made vulnerable by COVID-19 as discussed in Sect. 3. To address these institutional shortcomings, social security must first be conceived of as a single large system composed of several sub-systems. The inter-departmental task team on social security made a range of proposals in this regard: First, there is a need for review and streamlining of the policy regimes consistent with the comprehensive system of social security. Second, the configuration of schemes that will deliver benefits within each part of the social security system also need to be reviewed and streamlined. Third, the financing arrangements (contributions, subsidies, asset management) across all parts of system require a review and consolidation or rationalization. Fourth, the benefit regimes across all schemes should be harmonized. Fifth, the registries for members and beneficiaries should be centralized for strategic and administrative purposes. Sixth, benefit application, adjudication, and assessment processes across all schemes should be consolidated to ensure fairness for applicants and beneficiaries. Seventh, there is a need to streamline mechanisms by which eligible residents can enforce their rights to social security across all schemes irrespective of the tier in which they occur. Finally, the configuration of schemes should be better organized and coordinated to deliver benefits within each sub-system.

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Recommendations The following are recommendations for a comprehensive system of social security. They derive from: information provided in this report; extensive consultations undertaken by the author within government; government consultation documents (Department of Social Development 2007a, b, 2009; Inter-departmental task team on Social Security 2012; Minister of Social Development 2015; National Planning Commission 2011; National Treasury 2007, 2013; Rusconi, 2007; van den Heever 2010, 2012); and discussions underway within the National Economic Development and Labour Council. First, a definition of social security consistent with the Bill of Rights must be developed through substantive public engagement and formalized within a legislative framework. Second, the right to social security must be formalized through express clarification of: what the complete right to social security entails; the extent to which the right to social security is presently achieved; and a progressive realization pathway to the achievement of the complete right. Third, the allocation of functions to ministries must be reorganized. Ministry of Social Security: should be responsible for comprehensive social security. This ministry should also make policy regarding social assistance and all of social insurance. It would also be the executive authority for all agencies and regulators responsible for social assistance and social insurance. ● Ministry of employment and labor: should be responsible for labor activation policies. These programs should be integrated with social assistance and social insurance schemes. All existing social insurance functions should all be moved to the Ministry of Social Security. ● National Treasury: should be responsible for social security revenue collection; policy regarding the regulation of private schemes forming part of the social security system; and the executive authority for regulators supervising private schemes forming part of the social security system. ● Ministry of social services: should be responsible for all the social services presently falling under the Department of Social Development. ● Ministry of health: should continue to be responsible for general health policy apart from those aspects that form part of social insurance. The latter would include coverage for employment-related

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injuries and diseases, and third-party health coverage for motor vehicle accidents. Fourth, the scope of social assistance schemes should be deepened, with consideration given to the universal grants for child support, pregnant women, old age (incorporated into the three-tier retirement framework) and disability (incorporated into the three-tier retirement framework). Fifth, the unemployment protection regime should be revised to address long-term and structural forms of unemployment. This should include the implementation of unemployment social assistance linked to labor activation programs. The labor activation programs should be coordinated with industry via the Ministry of Trade, Industry and Competition. Sixth, a three-tier framework should be implemented for old age protection, death, and disability. This should involve the development of agencies capable of delivering the tier 2 framework and associated regulators of private formal social security schemes for tier 3. Seventh, the institutional framework for comprehensive social security must be designed and implemented as system with the following elements.

The distribution of functions according to ministry could be reconfigured as indicated above. An independent social security board should be implemented made up of social partners and technical experts, which will supervise all social security agencies and regulators. A consolidated social insurance framework should be implemented that addresses the second tier of contributory coverage. This framework would encompass the functions of the UIF, the CF, and the related schemes in falling under the ministry of health. It would also provide second and third tier arrangements for old age, death, and disability. New agencies could be established to cater for critical transversal functions required by all parts of the social security system. These agencies would be supervised by the social security board and include: ● An agency to manage a master social security registry for all of social security;

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● An agency to manage the public interface for all parts of the social security system (a version of this exists in Australia called Centrelink); ● An agency to manage clearing house functions for the three-tier retirement system; ● The unbundling of the public investment corporation into several separate independent public investment agencies; ● An agency to manage disability assessments for all social assistance, social insurance, and tier three retirement schemes; and ● A complaints adjudication agency to manage all complaints and appeals for all parts of the social security system. ● Seventh, establish an implementation authority dedicated to managing the process of implementing the comprehensive social security institutional framework. This is required due to the need to have a multi-year dedicated project team for implementation.

Conclusion The COVID-19 crisis during 2020 highlighted already identified weaknesses in the system of social security. Despite various policy processes dedicated to the identification of priorities for reform, very little has changed since 1994 apart from scaling up certain social assistance benefits and making some minor entitlement changes to the UIF. The set of programs that presently make up social security in South Africa are of insufficient scope and design to address the structural causes of inequality, poverty, and unemployment in South Africa. While South Africa has some unique contextual features, many of the prevalent social outcomes are arguably the expected consequence of an under-developed social security system. South Africa therefore needs to prioritize the design and implementation of a comprehensive system of social security. A priority in this process is the reconfiguration of the institutional framework for social security sufficient to accommodate a three-tier system for a comprehensive spectrum of risk prevention and mitigation measures. An expansion of benefits should focus on increasing the ratio of formal to informal social security benefits rather than a net increase in benefits. In some cases, particularly in the case of social assistance, increased government outlays are appropriate on an incremental basis. For contributory schemes, social insurance arrangements can take the form of public schemes and regulated private schemes.

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South Africa has a long path ahead to realize a comprehensive system of social security. After virtually no movement post-1994, it has become important for social cohesion and economic development to take more pronounced action. This especially in light of the fact that South Africa’s poverty and inequality outcomes are arguably the outcomes of policy choices (as much post-1994 as before) rather than accidents of fate.

References Barr, N. 2012. Economic theaory 2: Insurance. In Economics of the welfare state, 4th ed., ed. N. Barr, 83–101. Oxford: Oxford University Press. Budlander, G. 2003. Justiciability of the right to housing—The South Africa experience. Legal Resources centre, Cape Town. Retrieved from https://docs. escr-net.org/usr_doc/budlenderhousing.pdf. Burns, J., M. Keswell, and M. Leibbrandt. 2005. Social assistance, gender, and the aged in South Africa. Feminist Economics 11 (2): 103–115. https://doi. org/10.1080/13545700500115944. Cichon, M., W. Scholz, A. van de Meerendonk, K. Hagemejer, F. Bertranou, and P. Plamondon. 2004. Financing social protection. Geneva: International Labour Office. Department of Social Development. 2007a. Concept design options for the institutional framework [of Social Security]. Retrieved from http://www. treasury.gov.za/publications/other/ssrr/Session%20Five%20Papers/SS%20I DTG%20Institutional%20Sept2007%20v2.pdf. Department of Social Development. 2007b. Reform of retirement provisions. Retrieved from http://www.treasury.gov.za/publications/other/ssrr/ General%20Papers/SocDev%20Reform%20Retirement%20Provisions.pdf. Department of Social Development. 2009. Creating our shared future: Strategic considerations for a comprehensive system of social security. Pretoria: Department of Social Development. Department of Social Development. 2017. Wits School of Governance, & Oxford Policy Management. Social Budget Bulletin. Pretoria. Finn, A., M. Leibbrandt, and M. Oosthuizen. 2014. Poverty, inequality, and prices in post-Apartheid South Africa (2014/127). Retrieved from https:// www.wider.unu.edu/sites/default/files/wp2014-127.pdf. Frye, I., G. Wright, T. Elsley, M. Noble, H. Barnes, J. Jele, F. Masekesa, W. Zembe-mkabile, and D. McLennan. 2018. Towards a decent life for all: Decent standard of living index. Retrieved from Johannesburg. http://spii. org.za/wp-content/uploads/2018/11/DSL-Report-SD-v3.doc.pdf.

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Goldblatt, B. 2009. Gender, rights and the disability grant in South Africa. Development Southern Africa 26 (3): 369–382. https://doi.org/10.1080/037683 50903086689. Government of the Republic of South Africa and Others vs Grootboom and Others. Constitutional Court of South Africa. 2000. Retrieved from http:// collections.concourt.org.za/bitstream/handle/20.500.12144/2107/Full% 20judgment%20%28478%20Kb%29-2798.pdf?sequence=4&isAllowed=y. Hall, K., and W. Sambu. 2016. Demography of South Africa’s children. In South African child gauge 2016, ed. S.J. Aislinn Delany and Lori Lake, 106–110. Cape Town: Children’s Institute, University of Cape Town. Hoeller, P., I. Joumard, M. Pisu, and D. Bloch. 2012. Less income inequality and more growth—Are they compatible? Part 1. Mapping inequality across the OECD. Retrieved from https://doi.org/10.1787/5k9h297wxbnr-en. Howell, D.R., and M. Rehm. 2009. Unemployment compensation and high European unemployment: A reassessment with new benefit indicators. Oxford Review of Economic Policy 25 (1): 60–93. Hundenborn, J., M. Leibbrandt, and I. Woolard. 2016. Drivers of Inequality in South Africa (194). Retrieved from http://opensaldru.uct.ac.za/bitstream/ handle/11090/853/2016_194_Saldruwp.pdf?sequence=3. Inter-departmental Task Team on Social Security. 2012. Comprehensive social security in South Africa, a discussion document. Retrieved from https://sta tic.pmg.org.za/161128Comprehensive_Social_Security_in_South_Africa.pdf. International Labour Office. (UD). The ILO Multi-Pillar pension model: Building equitable and sustainable pension systems. Retrieved from Geneva: https://www.social-protection.org/gimi/RessourcePDF.action?id=55234. Minister of Social Development. 2015. White Paper on the rights of persons with disabilities (39792). Pretoria: Government Gazette. Retrieved from https:// www.gov.za/sites/default/files/gcis_document/201603/39792gon230.pdf. Mkandawire, T. 2005. Targeting and universalism in poverty reduction. Retrieved from Geneva: https://www.unrisd.org/80256B3C005BCCF9/(httpAuxPa ges)/955FB8A594EEA0B0C12570FF00493EAA/$file/mkandatarget.pdf. National Planning Commission. 2011. National Development Plan 2030, our future, make it work (978–0–621–41180–5). Retrieved from Pretoria: https://www.gov.za/issues/nationaldevelopment-plan-2030. National Treasury. 2007. Social security and retirement reform, second discussion document. Retrieved from http://www.treasury.gov.za/publications/ other/ssrr/General%20Papers/SocDev%20Reform%20Retirement%20Provisi ons.pdf. National Treasury. 2013. Charges in South African retirement funds. Retrieved from http://www.treasury.gov.za/public%20comments/charges% 20in%20south%20african%20retirement%20funds.pdf.

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OECD. 2015. In it together: Why less inequality benefits all. Retrieved from https://doi.org/10.1787/9789264235120-en. OECD. 2020. Income distribution. https://www.oecd-ilibrary.org/content/ data/data-00654-en. Ostry, J. D., A. Berg, and C. G. Tsangarides. 2014. Redistribution, inequality and growth (SDN/14/02). Retrieved from http://www.imf.org/external/ pubs/ft/sdn/2014/sdn1402.pdf. Ozkan, U.R. 2014. Comparing formal unemployment compensation systems in 15 OECd countries. Social Policy & Administration 48 (1): 44–66. https:// doi.org/10.1111/spol.12010. Republic of South Africa. 1996. Constitution of the Republic of South Africa. Retrieved from https://www.gov.za/documents/constitution-republic-southafrica-1996. Rønsen, M., and T. Skarðhamar. 2009. Do welfare-to-work initiatives work? Evidence from an activation programme targeted at social assistance recipients in Norway. Journal of European Social Policy 19 (1): 61–77. https:// doi.org/10.1177/0958928708098524. Rusconi, R. 2007. South Africa’s mandatory defined contribution retirement saving system: Provider accreditation Reform of retirement provisions, feasibility studies, 51–120. Pretoria, South Africa: Internal Communication. Samson, M. 2007. An options assessment with respect to making the state old age pension universal reform of retirement provisions, feasibility studies, 1–17. Pretoria, South Africa: Department of Social Development. StatsSA. 2018. General household survey 2018. Online: Statistics South Africa. Surender, R., M. Noble, G. Wright, and P. Ntshongwana. 2010. Social assistance and dependency in South Africa: An analysis of attitudes to paid work and social grants. Journal of Social Policy 39: 203–221. https://doi.org/10. 1017/S0047279409990638. Taylor Committee. 2002. Transforming the present—Protecting the future: Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa. van den Heever, A. M. 2010. Alignment of risk benefits provided by social security agencies. Retrieved from Johannesburg: https://www.gtac.gov.za/ wp-content/uploads/2022/02/Alignmentof-Risk-Benefits-Provided-by-Soc ial-Security-Agencies.pdf. van den Heever, A. M. 2011. Achieving a responsive social security system. In Future inheritance, 1st ed., ed. D. Plaatjies, 236–251. Aukland Park, South Africa: Jacana Media (pty) Ltd. van den Heever, A. M. 2012. Social protection floor for south africa, concept note. Retrieved from http://socialprotection.org/discover/publications/soc ial-protection-floor-south-africa.

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van den Heever, A. M. 2016. Pregnancy and maternal support for the protection of mothers and young children. In South African child gauge 2016, ed. S. J. Aislinn Delany and Lori Lake, 84–87. Cape Town: Children’s Institute, University of Cape Town. van den Heever, A. M. 2021. Case G: Comprehensive social protection reform in South Africa. In Handbook on social protection systems, ed. S. Esther and Loewe Markus. Cheltenham: Edward Elgar. Vijaya, R.M., R. Lahoti, and H. Swaminathan. 2014. Moving from the household to the individual: Multidimensional poverty analysis. World Development 59: 70–81. https://doi.org/10.1016/j.worlddev.2014.01.029. Wits School of Governance. 2020. Social Budget Report complete dataset. https://www.dsd.gov.za/index.php/documents?task=download.send&id= 344&catid=63&m=0 Wittenberg, M. 2017. Wages and wage inequality in South Africa 1994– 2011: Part 2—Inequality measurement and trends. South African Journal of Economics 85 (2): 298–318. https://doi.org/10.1111/saje.12147. Woolard, I., K. Harttgen, and S. Klasen. 2011. The history and impact of social security in South Africa: Experiences and lessons. Canadian Journal of Development Studies / Revue Canadienne D’études Du Développement 32 (4): 357–380. https://doi.org/10.1080/02255189.2011.647654.

CHAPTER 8

Repositioning State-Owned Enterprises (SOEs) and Development Finance Institutions (DFIs) Garth le Pere

Introduction The purpose of this chapter is to examine three cross-cutting themes: the nature and purpose of state-owned enterprises (SOEs) and development finance institutions (DFIs) in South Africa’s political economy; their performance, with reference to their effectiveness and ability to deliver on their developmental mandates; and how such triangular engagement could assist in addressing the country’s low-growth trajectory and prospects for economic recovery through enhanced cooperation with the private sector. The chapter is informed by the country’s critical social and economic context, which is approaching crisis proportions and requires urgent redress. The economy is experiencing a technical recession—compounded

G. le Pere (B) Political Studies Department, University of Pretoria, Pretoria, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_8

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by the impact of the COVID-19 pandemic. Growth was −0.5% in the fourth quarter of 2019 and −0.1% in the first quarter of 2020 (BusinessTech 2020). Even before the effects of the pandemic were recorded, the rate of unemployment was more than 30% (Winning 2020). Almost three million people lost their jobs between February and April 2020, with women in active employment affected the worst (Polity 2020). Moreover, the economy is projected to contract by 8% in 2020 and will only reach 2019 levels in 2023 (StatsSA 2020). The purpose of this chapter is to review the role of DFIs and SOEs as strategic drivers of South Africa’s development agenda. The National Development Plan (NDP) is explicit about the transformative role of SOEs in realizing the government’s development policy goals: “SOEs are central to advancing national objectives through providing economic and social infrastructure. By 2030, South Africa needs to be served by a set of efficient, financially sound and well-governed SOEs … These enterprises must deliver a quality and reliable service at a cost that enables South Africa to be globally competitive” (National Planning Commission 2012, 438). DFIs, in turn, provide investment finance and mobilize financial resources for strategic sectors of the economy. As such, they are expected not only to foster economic and social development that is welfare enhancing, but also to address failures in financial markets in a manner that complements government resources and minimizes fiscal risk (Gumede et al. 2011, 6). The chapter argues that national objectives would be better met if SOEs and DFIs were consolidated under a single legal, policy, and operational ambit, rather that treating them separately, as seems to have been the case. There is significant overlap between SOEs and DFIs in their basic function and strategic intent. Greater growth and development synergies can be unlocked by bringing them together, rather than having them function in strategic and operational isolation from each other. DFIs could significantly enhance the effectiveness of SOEs by directly and indirectly supporting their development functions and funding models. Above all, the rationale for DFIs is their ability to command market-related revenues and maintain and replenish market capitalization independently from the state. They typically must have bankable balance sheet capability and must be able to post a surplus (Calice 2013). The research question this chapter sets out to address is how SOEs and DFIs could be brought together into a single system of oversight and management because they have essentially existed in separate realms

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as far as their focus, relevance, and function are concerned, yet serve similar and mutually reinforcing developmental purposes. The chapter provides diagnostic assessments of SOEs and DFIs regarding their governance structures, mandated objectives, and operations and functions by drawing on relevant literature and official reports. The chapter further emphasizes the extent to which the private sector could become an effective partner in South Africa’s economic recovery, with an emphasis on addressing economic risk and contributing to resilient growth. The chapter thus offers modal considerations for how SOEs, DFIs, and the private sector could provide an innovative, adaptive, and competitive methodology for public–private partnerships and thereby assist in boosting state capacity and contributing to a more effective public sector. However, to encourage private sector participation, there must be greater policy certainty regarding how the three-way partnership will work, with roles and expectations clearly defined and demarcated. The above must include allowing the private sector to assume strategic leadership roles and functions in project management that involve SOEs and DFIs. As Busi Mavuso (2020, 12), chief executive of Business Leadership South Africa, has asserted: “The private sector has the skills and capacity successfully to lead large-scale and small projects.” This is critical for ensuring effective implementation and execution, but importantly also for stimulating growth and relieving pressure on the fiscus. Crucially, the South African state cannot manage the challenges of economic recovery on its own, especially in infrastructure. Mavuso (2020, 12) has further pointed out that, “[w]ith the global economic environment unlikely to provide easy wins for emerging market nations such as ours in the medium term, it’s imperative that we work to unlock infrastructure opportunities that will stimulate the economy in a fiscally neutral manner.” The government’s intention is to allocate 23% of GDP to infrastructure development by 2024, of which 8% is expected to come from the public sector and 15% from the private sector (Mavuso 2020). This spending ambition provides a great opportunity to demonstrate the effectiveness of a public–private cooperative framework. The chapter begins with an overview in section ‘Assessing the State of SOEs and DFIS’ of the state of SOEs and DFIs in order to highlight their relevant characteristics, focusing on their structural features and functional designs, and is based on official evaluations and assessments. This is followed in section The Comparative Experience: What Can SA Learn? by an overview of comparative country experiences and international best

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practice metrics that are relevant as indicative lessons for South Africa. Section ‘Governance of SOEs, DFIs, and the Private Sector: Toward a PPP Framework’ develops a framework to better understand the triangular relationship between SOEs, DFIs, and the private sector, drawing on Organisation for Economic Cooperation and Development (OECD) guidelines for public–private partnerships. Section 5 then suggests several policy recommendations that constitute an agenda for reforming SOEs and DFIs, and which could open opportunities for private sector participation. Finally, section ‘Conclusion’ makes some concluding remarks on the social and economic challenges that South Africa now confronts, and the potential for SOEs, DFIs, and the private sector to address these and thus make a significant contribution to the country’s economic recovery.

Assessing the State of SOEs and DFIS This assessment is not intended to be exhaustive, but will illustrate the major themes, focal areas, and challenges that have shaped the discourse about the status and purpose of SOEs and DFIs in South Africa. SOEs have been the subject of careful examination, detailed analysis, and sustained scrutiny, presumably because of their strategic importance to the state’s growth and development agenda. Chapter 3 in this volume discusses state-owned enterprises through the conceptual frame of building dynamic state capabilities. The most authoritative and comprehensive of these examinations was released in 2013 and is titled, Growing the Economy, Bridging the Gap (Presidential Review Committee on State-Owned Entities 2013; hereafter the PRC).1 In addition, the National Planning Commission (NPC) in the Presidency commissioned five working papers in 2019 under the general theme, “The role of SOEs in achieving economic transformation and inclusive growth.”2 Then, in June 2020, President Ramaphosa established a “Presidential State-Owned Enterprises Council” (PSEC) to help his 1 This report is also known as the “Phiyega Report,” named after the chairperson of the Committee, Ms Mangwashi Victoria Phiyega. 2 Under this theme, paper 1 is titled, “An outcomes framework to link SOEs to the

National Development Plan”; paper 2 is a “Framework for the suitability of SOEs”; paper 3 is “Institutional Governance”; paper 4 is “A Synthesis Report”; and paper 5 is called “The contribution of SOEs to Vision 2030: Case Studies of Eskom, Transnet and PRASA.” The case studies in the papers focus exclusively on a sample of three apex SOEs, namely Eskom, Transnet, and PRASA.

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government turn SOEs into “effective instruments of economic transformation and development” (South African government News Agency 2020). The common threads of investigation and assessment that run through the PRC and NPC reports are, firstly, how SOEs could better serve the ends of South Africa’s developmental state ambitions, especially in addressing the following: high levels of poverty and unemployment; the skewed distribution and maintenance of infrastructure; the unequal distribution of land and capital; and growing disparities between rich and poor. Secondly, how well-positioned and ready the SOEs are to play prominent, appropriate, and leading roles in achieving the economic transformation goals and meeting the competitiveness objectives of the National Development Plan in terms of their current performance, structure, governance, and funding strategies. However, it is noteworthy that DFIs have not been the focus of the same level of scrutiny and examination, given their complementary, symbiotic, and mutually supportive roles to SOEs.3 DFIs are no less important when it comes to job creation, promoting shared and sustainable economic growth, and contributing to the pro-poor expansion of infrastructure, and to increased service delivery. DFIs also occupy significant areas of strategic activity in the economy. This includes financing entrepreneurship in competitive industries; providing physical, social, and economic infrastructure; promoting Black economic empowerment in asset and fund management; alleviating poverty in rural communities; providing financial services to the commercial farming sector; advancing youth development; and building sustainable human settlements (Global Impact Investing Network [GIIN] 2016, 12–13).

3 As far as can be determined, there has been only one official enquiry into the roles, functions, and performance of DFIs, namely that by the National Treasury (2008). There are also DFI capital allocation and expenditure references in National Treasury annual reports and budget reviews. Beyond this, there are two commissioned studies: one by Gilbert Khadiagala (2011), and the other by William Gumede et al. (2011). A recent, comprehensive working paper focuses on three leading DFIs, namely the Industrial Development Corporation (IDC), the Development Bank of Southern Africa (DBSA), and the National Empowerment Fund (NEF) (see Goga et al. 2019).

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An Overview of SOEs According to the PRC’s consolidated database, there were 715 SOEs that existed across all levels of government at the end of May 2012 (PRC 2013, 8). A more recent figure claims that there are “about 800 SOEs in South Africa” (National Planning Commission [NPC] 2019, 6). The PRC was particularly concerned about how such as large portfolio of SOEs was responding to the government’s development agenda. These include commercial and non-commercial SOEs, their subsidiaries, and Chapter 9 institutions. The subsidiaries carry out public functions and include research entities, regulatory agencies, and advisory bodies. Taken altogether, the asset base of all SOEs in South Africa is said to be over R1 trillion (Fourie 2014). They contribute about 8.5% of GDP and employ more than 250 000 people (NPC 2020, 8). Commercial SOEs include four types of incorporated and nonincorporated entities: ● State-owned companies (SOCs), which function under the Companies Act and have been the focus of the enquiries referred to; ● State-interest companies (SICs), in which the state has a material interest but no control; ● Statutory corporations (SCs), which provide goods and services of a strategic nature; and ● Financial intermediaries. The most important commercial SOEs are the 20-plus national stateowned companies (listed under Schedule 2 of the 1999 Public Finance Management Act [PFMA]); and the 14 Water Boards and water companies (listed under Schedule 3 of the PFMA). Together, they play a significant and direct role in the economy by maintaining networks and services in strategic areas such as infrastructure, finance, national security, and social sectors. The most important infrastructure SOEs are Eskom, Transnet, South African Airways, PRASA, SANRAL, the Water Boards, and the Airport Corporation of South Africa (ACSA). Other SOEs in this group of state-owned companies include: ● Financial SOEs, such as the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC), and the Land Bank;

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● SOEs in the national economic security sector, such as Denel (defense), the Central Energy Fund, PetroSA, Armscor, and the Trans Caledon Tunnel Authority; and ● SOEs that have social and developmental mandates, such as the SA Post Office, Post Bank, the SABC, and the SA Forestry Company Ltd. The PRC Assessment The PRC made several important observations about the conduct of SOE’s, which can be summarized as follows (PRC 2013, 8): There is an absence of a universal long-term vision and clear strategic plan for the roles that SOEs are expected to play. This is indicative of no common agenda for and understanding of SOEs, different terminology for defining SOEs, no commonly agreed strategic sectors and priorities, and challenges of how to balance the trade-offs between the commercial and non-commercial objectives of SOEs. The legislative framework, governance, ownership policy, and oversight systems for SOEs are inadequate, pointing to conflicts of interest and duplication. These challenges are compounded by the quality of boards, the way executives are recruited, and how remuneration frameworks and practices are implemented. These challenges have direct effects on the governance and operational management of SOEs. SOEs struggle to contribute to meeting the government’s development agenda because of the massive capital injections they require, leading to a mixed record of service delivery performance. The funding models for the social and economic development mandates of SOEs often result in undercapitalization and are blurred and confusing. SOEs suffer from a lack of strong and robust leadership, especially in meeting the development objectives of shareholder compacts. There is poor collaboration and cooperation among SOEs in service delivery, with direct consequences for broad transformation objectives such as black economic empowerment, employment, and skills development.

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These generic problems and challenges have resulted in “socialising” the costs through government bailouts and other forms of state rescue (Bowman 2020, 4). According to the PRC Report (2013, 13), “SOEs should have a business structure with a mix of features from public and private sector institutions.” This brings into stark relief the difficulty of balancing economic imperatives with socio-political objectives or the interests of the public against revenue and profitability targets. Consequently, implementing performance management models and enhancing clarity of definition and purpose of SOEs are especially important in striking the correct balance. The absence of a correct business structure helps to explain weak governance frameworks and practices, which are at the root of the operational malaise among SOEs. The result is an “oversight matrix that is convoluted and overbearing,” and lacking in transparency when it comes to defining output indicators, especially those of a socio-political nature (PRC 2013, 56). SOE performance is further hindered by poor technical and management skills; a lack of financing capacity to sustain their operations; and poor strategic foresight to plan for the road ahead. What is clear from the PRC Report is that SOEs are managed more like departments of government rather than public entities that conform to the letter and spirit of Chapter 10 of the Constitution, which sets out basic values and principles for public administration. These include a high standard of professional ethics; efficient and effective use of public resources; the impartial and fair delivery of services; accountable and transparent management and administration; and maximizing human potential (South Africa 1996, 107–112). The PRC Report thus devotes significant attention to providing diagnostic assessments and recommendations for reform in three critical areas. The first is creating an enabling environment for SOEs (PRC 2013, 67–128) with reference to legislation, corporate governance, ownership, the establishment and disestablishment of SOEs; board and executive management appointments and prospects for closer SOE collaboration; and systems of SOE remuneration and economic regulation. The second examines the performance of SOEs (PRC 2013, 130–190), with a focus on their efficiency and effectiveness in service delivery, as well as their funding models and financial viability. The third is concerned with enhancing

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state capacity (PRC 2013, 192–202), with an emphasis on developing competencies in strategic management, legislation, and policy; improving human and financial resources; and putting in place systems for better collaboration and oversight. The NPC Assessment The commissioned NPC papers seek to provide a conceptual framework for examining the interface between the NDP and SOEs, and how SOEs can better contribute to the goals and objectives of the NDP. The papers are especially concerned with an evidence-based audit and review of the performance of three entities in three strategic areas of state-owned activity: Eskom and the provision of electricity; Transnet and the provision of freight logistics; and the Passenger Rail Agency of South Africa (PRASA) and the provision of commuter and passenger rail services. The conceptual framework defines six operational themes for Eskom, Transnet, and PRASA that are relevant and important to their contribution for achieving the developmental outcomes of the NDP (NPC n.d., 11). a. Commercial economic mandate: they must provide economic infrastructure and services efficiently, cost-effectively, and reliably; b. Non-commercial developmental mandate: they must provide social services to excluded groups efficiently, cost-effectively, and reliably; c. Financial viability: they must sustain an asset base and balance sheet to make the necessary capital investment and must maintain and expand services; d. Environmental sustainability: they must support the transition to a low-carbon economy and observe environmental standards; e. Specific projects: they must be able to undertake specific projects as defined in the NDP; f. Transformation responsibility: they must promote equitable participation in the economy through employment equity, training, and supplier development. The achievement of these six operational themes must be predicated on putting in place governance enablers that have a clear mandate, strong and

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competent leadership, technical and managerial expertise, and an effective framework of partnerships with the private sector. When examining the intersections between the operational themes and governance enablers, the overall finding is that Eskom, Transnet, and PRASA “… are not performing well in delivering to the aspirations of the NDP,” although progress has been registered in some areas such as black economic empowerment. This is largely ascribed to “years of uncertain policy expectations; precarious funding strategies; poor institutional accountability and poor governance; and political interference” (NPC 2020, 4). This record has direct implications for economic growth, government debt, and spillovers into national credit risk, which in turn have adverse effects on improving welfare and reducing poverty and unemployment. Paper 2 in the NPC series explores the market structure and socio-economic conditions firstly, under which government intervention through a state-owned entity makes sense; and secondly, the extent to which SOEs can create material operational, financial, and operational risks for the government as shareholder. Recent experience has revealed that the three SOEs investigated are costly, inefficient, and poorly managed and there have been instances where the government had to provide significant bailouts and substantial debt guarantees in the face of them underperforming or failing to meet their financial obligations (Frauenknecht et al. 2019, v). Paper 3 explores modes of institutional governance in the governmentSOE interface and focuses on improving the oversight and performance of Eskom, Transnet, and PRASA. While there might be a comprehensive institutional framework for SOEs, the political appointment of boards and senior management does not conform to internationally accepted rules and standards for corporate governance. This has severe and direct effects on company performance and procurement practices. The paper finds that Eskom and PRASA are loss-making, while all three have struggled to balance broader public policy objectives with being commercially viable. Accordingly, they operate “… in an environment where market discipline is replaced by bureaucratic, regulatory and administrative scrutiny that in the past was susceptible to ‘capture’ by interest groups” (NPC 2019, xi). This has led to a current system where decisions regarding boards and governance are politicized, and where commercial objectives and development goals are weakly coordinated.

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When it comes to oversight, the system is effectively run and managed by civil servants “… who are by definition more vulnerable to direct political pressure and less inclined to be practical in addressing emerging problems; at the same time, they are less accountable in their relatively protected positions and not incentivised to pursue stewardship performance for which they would be accountable” (NPC 2019, vi). The government has made recent changes and instituted reform in governance processes and board appointments in SOEs. These are a consequence of the ongoing weaknesses in institutional oversight which have resulted in corruption and mismanagement. All three SOEs face growing uncertainty on funding strategies and tariff policies that result in poor financial sustainability; and there is a distinct lack of proper performance management systems and disclosure practices to ensure transparency and accountability (NPC 2019, 49–53). In view of these considerations and to better align the performance of the three SOEs with relevant NDP objectives, the NPC makes recommendations in four areas of reform: governance, finance, structure, and policy and process. Governance reforms should include a better alignment of shareholder compacts with the NDP, such that 70% to 80% of the weighting of shareholder compacts should focus on the core economic mandate, improved governance, and sustainable funding. Financial reforms should concentrate on providing greater clarity on the balance between commercial and development objectives and how each will be funded and costed. Where there are repeated failures in operational, governance, and financial performance, financial reform should open the provision of the service or infrastructure to other economic actors and/or change the structure of state ownership. Policy and process reform should be informed by introducing a single policy of state ownership, supported by improved transparency and strengthened regulatory capacity (NPC 2020, 5–6). An Overview of DFIs Like SOEs, historically DFIs in South Africa were integral to the apartheid state’s project in state-led industrialization. They were engaged in and helped to shape the private enterprise arena but with a specific role of lowering the strategic costs of business and providing public finance and cheap access to network infrastructure (Bowman 2020, 6). It was

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especially the pressures of increasing international isolation and the debilitating effects of sanctions that saw the successive apartheid regimes increasingly resort to DFIs as part of increasing the state’s presence in the economy and, thereby enhancing its ability to tightly control the highly concentrated private sphere. DFIs were thus critical components of the state machinery in developing a racially based industrial economy, which later helped to provide the necessary shock-absorbing capacity against sanctions (Clark 1994). Since 1994, however, the DFIs have been repurposed as part of the government’s developmental agenda, especially in improving social welfare and addressing the deprivations of the apartheid era. There are two categories of DFIs that characterize the post-1994 order: those providing loan and equity financing as an integral part of their development activity; and those providing grant-based funding and other forms of non-financial assistance to support development (Goga et al. 2019, 9). Through the ethos of DFI, investments have evolved with the development priorities of government, and DFIs have specific targets by sector and planning cycles. In addition, public scrutiny and parliamentary oversight require that DFIs consider reputational risk while trying to achieve maximum investment returns. DFI mandates are based on three principles: additionality, where DFIs are only active in sectors and activities that are difficult for private sector capital sources to address; as catalysts for accelerated industrialization, job creation, economic growth, and human capital development; and being anchors of sustainability for bridging investment gaps (GIIN 2016, 4–6). In total, there are 16 DFIs, equally split between national and provincial levels (Goga et al. 2019, 9),4 and they conform to the essential rationale of serving the disadvantaged and economically marginal sections of the population by improving access to financial services, and supporting

4 The eight national DFIs are the Development Bank of Southern Africa; the Industrial Development Corporation; the Land Bank; the National Empowerment Fund; the National Housing Finance Corporation; the National Urban Reconstruction and Housing Agency; the Rural Housing Loan Fund; and the Small Enterprise Finance Agency. The eight at provincial level are the Eastern Cape Development Corporation; the Eastern Cape Rural Development Agency; the Free State Development Corporation; the Gauteng Enterprise Propeller; Ithala (Ithala Development Finance Corporation; the Limpopo Economic Development Agency; the Mpumalanga Economic Growth Agency; and the North West Development Corporation.

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job creation, small business development, and industrial and infrastructure development. Along with SOEs, they are the government’s means of promoting a quasi-welfare state through the benefits that DFIs derive from concessionary financial sources as a means for uplifting the standard of living of those affected by racialized poverty, unemployment, and inequality. The concessionary financial resources that are made available to DFIs include cheap borrowing, under-priced guarantees, exemptions from reserve requirements and taxes, and government coverage of a part or all of their operational costs and capital transfers. DFIs are thus essential for providing strategic finance to sectors and areas of social and economic activity that are typically not attractive to private and commercial banks; or what has been called “patient capital” required to build scale economies necessary for developing competitive industries and encouraging new market entrants (Gumede et al. 2011, 5–7; Goga et al. 2019, 3). The key DFIs that serve South Africa’s developmental agenda, such as the Industrial Development Corporation (IDC), the Development Bank of Southern Africa (DBSA), and the National Empowerment Fund (NEF), differ substantially in their cost structures, cost-effectiveness, clientele served, loan losses, and organizational efficiency. Importantly, they also invest across the SADC region and, in the case of the DBSA, on the African continent. However, they share a common feature in that the public funds entrusted to them are subsidized. Since 1994 and because of this inherent advantage, the objectives of DFIs have been considerably broadened and expanded to include addressing market failure by helping to develop private enterprise, promoting employment and business opportunities, especially via Black economic empowerment, enhancing the bases of human capital and institutional capacity, contributing to local production and beneficiation, and financing infrastructure development. These expanded mandates of DFIs have, however, translated poorly in terms of their costs and benefits to society and the economy, especially in diversifying productive activity. Capital-intensive upstream industries that draw on the country’s abundant resources continue to dominate production. This comes at the expense of developing downstream linkages, which remain weak even though the government has stressed the need for increasing beneficiation, strengthening local value chains, and supporting more downstream, labor-intensive growth.

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Moreover, there have been worrisome trends in the financial performance of DFIs as a distinct class of state entities. Their financial performance has been characterized by mounting losses, poor loan recovery, and continued dependence on the state to underwrite their operational costs, despite disbursing R275 billion annually (GIIN 2016, 13). They have hardly helped to mitigate market failure, but rather have allocated their resources in a very inefficient manner. If standard indicators such as return on assets, return on equity, and non-performing loan ratios are used, DFIs have underperformed when it comes to advancing their explicitly defined social purposes and objectives. In short, the self-sustainability of DFIs has been their Achilles heel and a major source of their institutional and financial vulnerability. As has been observed, South Africa’s DFIs “… have operated in the difficult circumstances of heightened expectations to redress existing inequities and spur economic growth. These roles are made more difficult by the fact that some private sector actors often perceive interventions by DFIs as running counter to principles of sustainable economic viability” (Khadiagala 2011, 17). The existential plight of DFIs is compounded by ideological and political contestation in the ruling ANC alliance about their appropriate role and function in society. This plays out in a manner consistent with two contending and diametrically opposed perspectives about the roles and activities of DFIs in Africa: one preferring a strong role for the state in turning DFIs into engines for guiding market forces; and another taking a less interventionist view based on the belief that market rationality works better in allocating resources (Calice 2013; see also Netshitenzshe 2010). The NDP provides a policy and intellectual compromise between these positions by insisting that public–private partnerships are key ingredients of economic transformation, most crucially in meeting the 14 outcomes of the NDP’s Medium-Term Strategic Framework for 2014–2019.5

5 These are: (1) Quality basic education; (2) A long and healthy life for all; (3) safety and security for all; (4) Decent jobs through inclusive growth; (5) A skilled and capable workforce; (6) An efficient, competitive, and responsive economic infrastructure network; (7) Vibrant, equitable rural communities; (8) Sustainable human settlements; (9) Comprehensive, sustainable, and responsible social protection systems; (10) Responsive, accountable, and efficient local government; (11) Protected and enhanced environmental assets and natural resources; (12) An efficient, effective, and development-oriented public service; (13) A diverse, socially cohesive society with a common identity; and (14) A better South Africa contributing to a better Africa and a better world.

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A Sample of DFIs: Profiles, Mandates, and Scope Below we provide a schematic sampling of DFI profiles, their mandates, and the scope of their activity6 : a. The Industrial Development Corporation (IDC): Established in the 1940s, the IDC initially provided financing for manufacturing, but this was later expanded to include energy and minerals beneficiation. Under sanctions in the 1970s and 1980s, there was further diversification into resource-based, high-technology, and importsubstituting industries. Since 1994, and with 52% of the asset base of all DFIs, the IDC has focused on developing and promoting black entrepreneurship, skills transfer, employment and gender equity in competitive industries, which include metal products and minerals; agriculture and agro-processing; clothing and textiles; and heavy manufacturing. b. The Development Bank of Southern Africa (DBSA): Created in 1983 to promote and coordinate the growth and development of the homelands, the DBSA has mainly focused on investing in and financing of physical, social, and economic infrastructure since 1994. Its mandate has been expanded to the entire continent and, consequently, it has taken on multiple roles, not only providing finance but also advisory services, opportunities for joint ventures and partnerships, and managing and implementing projects. It is self-financing, has retained a strong balance sheet, and enjoys sound domestic and international credit ratings. c. The Land and Agricultural Development Bank of SA: Established in 1912 as a means for financing rural and agricultural development, particularly for white commercial farmers. However, its mandate has shifted since 1994 to empower and encourage historically disadvantaged groups to enter the commercial farming and agro-processing sectors via a Special Mortgage Bond. Small-scale farmers and cooperatives were assisted through a Micro-Agricultural Finance Initiative. It is one of the largest DFIs in the country, having disbursed R200 billion in loans from 2011 to 2016 (GIIN 2016, 12).

6 This information has been gleaned from official websites and from Khadiagala (2011).

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d. Khula Enterprise Finance (KEF): Established in 1996 by the DTI to promote the development and sustainability of small, medium, and emerging businesses. KEF does not provide direct financing, but works through financial intermediaries and banks by providing collateral and guarantees for its clientele, who apply for commercial loans from banks. This changed in 2009 in the context of growing demand, when KEF set up Khula Direct with a capital base of R3 billion for making direct loans to SMMEs. In addition, KEF provides mentorship services and low-rental, start-up premises for its clientele. e. The National Housing Finance Corporation (NHFC): Set up in 1996, with oversight from the Department of Human Settlements (DHS), the NHFC provides affordable housing and finance across low- to middle-income groups that have a regular source of income. Its mandate includes finance for home improvements for such groups. Its major program, Breaking New Ground, is intended to provide finance for upgrading and eventually eradicating informal settlements. As a wholesale funding and risk-managing corporate entity, the NHFC was changed into a full-fledged bank in 2006. It has built partnerships with the private sector as well as with the DBSA in pursuit of its mission to address the housing backlog in the country. f. Rural Housing Loan Fund (RHLF): Also falling under the DHS, its core business is to generate social venture capital and provide loans through intermediaries to low-income households for what is called “incremental housing purposes.” With RHLF providing strategic guidance, this is a people-driven process to empower low-income families in rural areas so that they can acquire ready access to credit. Such ready access is meant to develop and unlock the potential of beneficiaries for self-help, savings, and local ingenuity for improving and building their own houses and shelters over time. In October 2018, the RHLF was merged with the NHFC. g. National Urban Reconstruction and Housing Agency (Nurcha): Established to initiate programs to ensure the sustainable flow of finance to build low-income and affordable housing, community facilities, and infrastructure in urban and peri-urban areas. Its basic aim is to extend the housing market for poor people; maximize options for the construction and financing of housing, related facilities, and infrastructure; promote synergy and cooperation between

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the public and private sectors; and contribute to the emergence and further development of black-owned construction companies. Like the RHLF, it was also merged with the NHFC in October 2018. h. National Empowerment Fund (NEF): Established by the NEF Act in 1998 and falling under the DTI, its basic objective is to promote BEE and innovative solutions for greater economic inclusion. It provides financial and non-financial support to meet this objective. Financial support is provided through five financing vehicles, which include rural and community development and a women’s empowerment fund. Non-financial support takes place through mechanisms such as pre- and post-investment, workouts and restructures, socioeconomic development, and asset management. i. The SA Micro-Finance Apex Fund (SAMAF): SAMAF was launched in 2006 to provide accessible and affordable financial services through sustainable financial intermediaries that benefit micro- and small businesses run by the poorest of the poor by growing their own income and asset bases, and thereby to assist in alleviating poverty and reducing unemployment. In addition, SAMAF facilitates training and capacity building for micro-entrepreneurs and intermediaries, as well as ensuring effective financial intermediation and making markets work for members of the poor who are enterprising. It has delivery networks, borrowers, and savers across all provinces. Assessing DFIs’ Roles and Functions The existence of these DFIs in South Africa’s political economy—both inherited from the apartheid era and created since the democratic transition—is consistent with three imperatives about their roles and functions. These are development, social, and political, which are germane to the risk and resilience argument we advance about how, firstly, DFIs and SOEs together can be repositioned to provide salutary interventions for better managing the dimensions of the country’s intersecting economic and social crises; and secondly, how their potential synergies could be enhanced considerably by drawing on the technical and financial capacities of the private sector. The development imperative derives from the thinking of early development economists from the 1950s and 1960s, who advocated government ownership of DFIs as part of a broader sentiment that defended

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public ownership of strategic economic sectors (for example, Lewis 1955; Myrdal 1960; Gerschenkron 1962). They were particularly concerned about matters such as national environments where capital was scarce, the public not trusting the private sector, and extensive fraudulent practices among debtors who discouraged long-term credit—all of which had a negative effect on economic growth. Grounded in the same lineage is the social imperative, which sees market failures in financial markets as justifying the need to establish DFIs (see, for example, Atkinson and Stiglitz 1980; Greenwald and Stiglitz 1986). As the argument goes, market failures occur because commercial banks are essentially driven by the profit motive, and hence have little or no incentive to provide public goods, or to finance projects that do not yield profit but have positive social externalities. By contrast, the political imperative takes a dim view of DFIs in the sense that they are created to serve the partisan ends of politicians, state elites, and their sectarian agendas (see, for example, Caprio and Honohan 2001; Schreiner and Yaron 2001). However, even though they can and do serve a social purpose, this is compromised and undermined by weak oversight and poor managerial practices, such that they are prone to dysfunction, corruption, and misallocation. The development, social, and political imperatives are especially relevant in addressing the deprivations of the past and challenges of the current crisis juncture (Levin 2011). For example, both the DBSA and IDC returns on assets have been greater than that of private banks. This is a function of DFI pricing policies following the principle of high risk and high return, very similar to private financial institutions. Since both the DBSA and IDC are Schedule 2 entities under the PFMA, they are expected to be profitable, declare dividends, and operate efficiently. In terms of operational efficiency, DBSA performs very well: its operating expenses as a percentage of revenue were below 30% from 1997 to 2017. While those of the IDC increased to a high of 80% in 2006, this declined markedly to below 30% in 2011, and further to below 20% in 2017. By contrast, the operational efficiency of the NEF, which is a Schedule 3A entity under the PFMA (thus enjoying subsidies from government), has remained high. Its operating expenses as a percentage of revenue reached 85% in 2004 and retained an average of 49% between 2001 and 2017 (Goga et al. 2019, 36). This, however, should not reflect negatively on the performance of the NEF, especially since the setting up of the Strategic Projects Fund in 2008, the projects of which are of a greenfield

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nature and directed to business process outsourcing; mining and mineral beneficiation; renewable energy; and agro-processing and tourism. These snapshots suggest that DFIs are well placed to play a transformative role that could support the functional effectiveness of SOEs, while leveraging both the capital and managerial assets of the private sector in a manner that delivers developmental spinoffs and meets the objectives of the NDP. Any reform agenda must inexorably move SOEs and DFIs away from their separate tracks toward mutually reinforcing and integrated roles and functions that will allow them to be more agile, flexible, free from political interference, and embedded in society. Funding levels and mandates should be reviewed based on three strategic underpinnings of SOEs and DFIs that demand reform: corporate governance; risk management; and financial performance and accountability. This will provide the policy certainty that will inspire private sector confidence and willingness to participate as a strategic partner of the SOE and DFI complex. This contextual backdrop provides useful parameters for examining experiences from other countries, as well as highlighting international best practice methods and models.

The Comparative Experience: What Can SA Learn? The influence of globalization, and with it the liberalization of trade, has highlighted the need for governments to address the challenge of building competitive economies. In this regard, governments have increasingly been turning to SOEs and DFIs to serve as catalysts of growth, development, job creation, and, indeed, as platforms of economic and social transformation (Porter 1990; Liang et al. 2015). Below, we examine and assess how the nature and experiences of SOEs and DFIs in other countries might be instructive for South Africa’s reform agenda, with due regard for the deficits and shortcomings that the chapter has highlighted above. The SOE Dimension There are two areas of international best practice from which South Africa could draw important lessons. These relate, firstly, to having a single, overarching legislative framework to govern SOEs; and secondly, to consolidating and rationalizing the roles and functions of SOEs to serve

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a common developmental purpose. International experience has demonstrated the importance of ensuring clarity about the multiplicity of roles that the state has in SOEs: as shareholder, policymaker, regulator, and operator under the rubric of an overarching legal framework or founding statute. The Problem of Models Some countries have consolidated the ownership and monitoring of SOEs in one central agency, in which one oversight mechanism exists to act as “owner” on behalf of the state and exercises shareholder rights. In addition, many governments have formulated an explicit and coherent “ownership policy” that defines the overall objectives of state ownership, the state’s specific role in the corporate governance of SOEs, and how the state will efficiently and effectively implement such ownership policy. Hence, appropriate legislative instruments and frameworks are cornerstones for defining the relationship between the state and SOEs, especially as far as their respective rights and responsibilities are concerned. There is a focus on the corporate governance of SOEs; the state’s rights and role as SOE owner; and its oversight functions (PRC 2013, 69). The PRC Report makes a compelling case for a single legal framework in view of “… prevailing confusion in legislation governing SOEs, characterised by the duplication, conflicting provisions, different founding legislations, and sometimes serious omissions” (PRC 2013, 99). For example, since South Africa has no consolidated framework for SOE corporate governance, relevant systems, structures, processes, procedures, and controls are scattered across different pieces of legislation, such as the PFMA, the Municipal Finance Management Act, the Municipal Systems Act, and the Companies Act; and across policies such as the Protocol on Corporate Governance in the Public Sector, under the jurisdiction of the Department of Public Enterprises. Furthermore, the King III Report on Corporate Governance has direct relevance for SOEs. South Africa’s SOEs thus operate under the weight of cumbersome legal and regulatory frameworks (PRC 2013, 79). Related to the problem of heterodox legal and policy frameworks is the difficulty of the decentralized model under which SOEs operate in South Africa. In this model, SOEs are the responsibility of branch or sector ministries, where a multitude of institutions from all spheres of government exercise the ownership function. However, the global trend

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has been to place SOEs, especially those with a commercial role and function, under one ministry or agency. Such a ministry or agency then establishes codes of conduct or guidelines that must be followed by other ministries or agencies that are involved with SOEs in one way or another. The advantages of a centralized model include separating the ownership from the policy function; facilitating greater consistency of ownership policy supported by unified guidelines on matters such as transparency, board nomination, and executive remuneration; improving clear financial reporting; and providing a common remit for managerial competences and administrative expertise (PRC 2013, 88). There are instructive examples of countries that use the centralized model (NPC 2019, 3): Egypt: There are several state-owned holding companies that function in different sectors. The Ministry of Investment has an ownership stake in about 150 SOEs, oversees state-holding companies, and develops the objectives of government’s role and ownership. Finland: An Ownership Steering Department in the Prime Minister’s Office is responsible for preparing and implementing the state-ownership policy. This Department sets objectives in consultation with line ministries. France: The Agence des Participations de l’Etat (Agency for State Participation) oversees the ownership of strategic SOEs, and reports to the Ministry of the Economy and Finance. Performance goals of SOEs must have medium- and long-term strategies, which are submitted to the Ministry and related line ministries. Hungary: The Hungarian National Asset Management Inc. reports to the Ministry of National Development. It is a state-owned entity limited by shares and oversees the management of state assets and other institutions designated by law or ministerial order.

The Problem of Sectors The challenges of consolidation and rationalization have also been highlighted by the PRC, especially regarding defining strategic and priority sectors for SOE participation (PRC 2013, 52–53). The Report notes an absence of common policy standards, criteria and frameworks across all spheres of government. Where there are references, these exist by default rather than by conceptual clarity or strategic intent. For example,

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both the New Growth Path and the NPC identify sectors that are critical for job creation, such as infrastructure, agricultural and mining value chains, the green economy, tourism, and retail and business services. The PRC Report lists additional sectors that are critical components of South Africa’s developmental state vision, such as defense, construction, energy, telecommunications, and water (PRC 2013, 53). South Africa could therefore benefit by examining international benchmarks for identifying strategic sectors. Here, the examples of China, Russia, and Singapore are especially insightful (PRC 2013, 52; NPC 2019, 7): China: In 2003, the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council, and Central Huijin Ltd. were formed to govern state ownership of all SOEs and DFIs, respectively. Both have overseen reducing the relative economic weight of the state sector by opening more industrial sectors to competition from nonstate enterprises, based on the approach of “grasping the big, letting go of the small” (Zhang 2019). As a result, the number of SOEs and DFIs owned by the central government declined from 196 in 2003, to 115 in 2013, to 96 currently. The SOEs and DFIs that fall under SASAC and Central Huijin are to be found in strategic industries and sectors that play vitally important roles in national security and are catalysts for growth and development. The government exercises absolute control over these sectors through sole ownership or a controlling stake. These include defense, petroleum and petrochemicals, electricity generation, transmission, and distribution, telecommunications, shipping, and civil aviation. There is an ancillary group that are designated as pillars and basic industries, such as machinery, automobiles, steel, base metals, chemicals, and research and development. Russia: In 2008, a law was passed that identified 15 sectors and industries of strategic importance to the country. These include defense, aerospace and aviation, nuclear, fishing, metals and alloys, publishing and printing, radio and TV broadcasting, and telecommunication services. Singapore: It has one of the largest SOE sectors in the world and the role of its “government-linked companies” (GLCs) is widely studied because of the major impact they have had on its industrialization and rapid economic growth from a largely entrepot or enclave economy (Cheng-Han et al. 2015). Singapore’s strategic sectors are concentrated in telecommunications, energy and power generation, rail and bus transport, and ports and airlines. There is also extensive GLC activity in the manufacturing of semi-conductors, shipbuilding, and banking.

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The DFI Dimension Coming to the role of DFIs and how they can collaborate with and find constructive synergies in the SOE complex, the rationale must be based on the principles of their contribution to accelerated industrialization, economic growth, and human capital development in the context of the country’s current economic crisis. The model that is often referred to is the BNDES, the Brazilian Development Bank (Torres and Zeidan 2016). It was established in 1952 and falls under the Ministry of Development, Industry and Trade. After the Chinese Development Bank, BNDES is one of the largest in the world, supporting investment in agriculture, commerce and industry, services, SMMEs, education, health, sanitation, and mass transportation. More recently, BNDES has been involved in renewable energy and green economy initiatives. It has been a major player in the growth and development of Brazil’s ethanol sector. There are also other countries where DFIs have been instrumental in helping to steer long-term industrialization (Gumede et al. 2011, 10– 15). Mexico: The Nacional Financiera is one of the six DFIs that focus exclusively on financing SMMEs whose start-ups face risk in supply chains, especially from big buyers. ● India: The Industrial Development Bank of India has been involved in the long-term financing and development of India’s ICT sector. ● South Korea: The Korea Development Bank, founded in 1954, supplies industrial capital as well as services in corporate, investment, and consumer banking; and the Industrial Bank of Korea, founded in 1961, is the main funding vehicle for SMMEs. Both are 100 percent government-owned. ● Japan: The Development Bank of Japan, founded in 1951, and the Japan Bank for International Cooperation, founded in 1999, are also wholly owned by the Japanese government. They have been the financial drivers of infrastructure development in varied roles other than development finance. These include providing consulting services, developing private sector partnerships, providing export credit, and implementing and managing projects. What emerges from these different roles played by DFIs is to ensure that, in the case of South Africa, there is careful but formalized alignment, coordination, and complementarity of their roles and functions with the

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strategic sectors of the entire SOE complex. This must form a critical part of any rationalization and consolidation exercise that underpins the future of SOEs in South Africa.

Governance of SOEs, DFIs, and the Private Sector: Toward a PPP Framework In this section, we start from the premise that South Africa’s economic recovery could be significantly enhanced by a virtuous cycle of deliberate interactions and focused initiatives between SOEs, DFIs, and the private sector. Such a PPP ecosystem, drawing on appropriate guidelines and practices, could assist the economy to deal with heightened risk to lives and livelihoods—the job creation and employment dimension as well as generate resilience that is necessary for economic recovery over the short (two years), medium (five years), and long terms (10 years)—the growth and macroeconomic dimension. Since 1994, the ANC-led government has produced a raft of development blueprints7 that anticipate specific roles and functions for SOEs and DFIs, but in which the private sector hardly features, even though it could be a significant stakeholder in providing patient capital if room for engagement is opened. To underscore the point in policy and practice, these documents converge around two axes in their strategic intent where the private sector could be a strategic voice and partner. The first axis is to narrow the wide gulf between the first and second economies of South Africa, one developed and the other poor. The second is to find an appropriate balance between the highly concentrated and monopoly character of the private sector and the developmental and welfare objectives of the public sector (Ashman 2015). The tensions between these two axes are not easily resolved, but highlight the need for a reappraisal of the respective roles of the public and private sectors, especially in view of the crisis conditions gripping the country. It is useful to examine two recent contributions that represent contrasting perspectives in this regard.

7 Examples are the Reconstruction and Development Programme (RDP); the Growth, Employment, and Redistribution Programme (GEAR); the Accelerated Growth Initiative for South Africa (ASGISA), the New Growth Path (NGP); and the National Development Plan (NDP).

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Two Perspectives: The ANC and B4SA The ANC’s Economic Transformation Committee (2020) recently released a document, Reconstruction, Growth and Transformation: Building a New, Inclusive Economy. It calls for a more active role for the state, with a wider reach. There is an emphasis on import substitution, local beneficiation of minerals, and greater public spending on local products and materials—all intended to generate “significant job creation multipliers.” Accordingly, the government should use its powers under the Disaster Management Act to fundamentally restructure the economy. This must be driven by intensive supply-side investment in large hard and soft infrastructure projects, including energy, water and sanitation, roads and bridges, human settlements, health and education, digital connectivity, and public transport. The document asserts that the COVID-19 pandemic “has legitimised a greater and more active role of the state in guiding the economy. It has forced a rethink on public services that are now seen as a necessary investment rather than a liability.” Representing the voice of the private sector, Business for SA ([B4SA] 2020) released its own document, A New Inclusive Economic Future for South Africa: Delivering an Accelerated Economic Recovery Strategy. The document emphasizes the importance of committed leadership that has the will and capacity to make difficult choices that will spur growth and domestic and foreign investment. New thinking on policy development and implementation by government is required, with a focus on improving the competitiveness of the economy by concentrating on the ease of doing business,8 as well as on education, innovation, and entrepreneurship. An area where there is strategic agreement between the ANC and B4SA is the need to invest in and build large-scale infrastructure projects that are labor-intensive, and that could assist the process of expansionary economic activity. With infrastructure providing an enabling environment, B4SA recommends that a constructive, effective policy framework be developed to support initiatives that could improve the country’s competitive position. The ANC document notes the need for “expanded public–private partnerships, including build, operate and transfer project delivery methods.”

8 According to the World Bank’s Ease of Doing Business Index, South Africa’s ranking has declined from 35th out of 190 countries in 2008 to 84th currently, a drop of 49 places in 12 years.

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B4SA (2020) echoes similar sentiments in a private sector fund-developoperate model (like a conventional build-operate-transfer (BOT) arrangement) that would ease the burden on the fiscus and SOEs by reducing the public sector funding requirement to R1.9 trillion over three years, and normalize the budget deficit at 3.5% by 2025. However, B4SA insists on policy certainty as a priority for this quid pro quo to work, which must be supported by regulatory reform, addressing crime and corruption, and tackling the scourge of state capture. The triangular formation that could frame a PPP could assist with developing a risk and resilience strategy (see Bracket et al. 2008; Shirky 2008). South Africa faces future exigencies punctuated by volatility, uncertainty, and complexity. This is made more challenging by a global environment in flux and turbulence. In a normative sense, PPPs provide a context for shared interests and greater solidarity between the public and private sectors; for developing coalitions, networks, and cooperative structures to explore effective solutions; and for offering a rationale for both government and business to concentrate resources on their core mission of assisting with reviving the economy through job creation, supply-side stimulus, small business development, as well as promoting social stabilization measures to deal with the fallout of the COVID-19 pandemic. PPP Quality and Performance: Principles and Practice The OECD guidelines and instruments serve as a framework for better understanding how risk and resilience can be embedded in PPPs involving SOEs, DFIs and the private sector. Quite crucially, South Africa is one of five OECD partners, along with Brazil, China, India, and Indonesia. Its participation covers a wide spectrum of policy issues, such as macroeconomic policy and structural reform, debt management, fiscal policy, domestic resource mobilization, anti-corruption, and public sector governance. It is an associate in six OECD bodies, participates in 15 projects, and adheres to 19 of its instruments, including its PPP guidelines (OECD 2018). The underlying ethos of PPPs is their long-term nature as agreements between the government and the private sector for delivering and funding services using a capital asset, and sharing associated risks. The effectiveness of the PPP depends on a sufficient and appropriate transfer of risk to the private partner. The private partner could undertake a variety

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of tasks, including the design, construction, financing, operation, and management of the capital asset required for service delivery; or do so in conjunction with the public partner. This is the essence of what Mavuso (2020) proposed earlier. PPPs by their nature are complex undertakings in terms of skills-sets, institutional structures, and legal frameworks, but if executed properly they deliver both public benefits and private gains. In a World Bank reference guide, the focal areas of PPPs with the best returns are in energy and power generation; provincial and municipal management; telecommunications and ICT; transportation; and water and sanitation. These focal areas deliver better welfare gains if they promote or include PPPs with a developmental purpose, such as green and climate-smart interventions; working for the poor and alleviating poverty; developing human resources and transferring skills; enhancing participation and job creation by SMMEs; promoting gender sensitivity and including women; providing funding for risk mitigation; and having mechanisms for transparency, good governance and anti-corruption (World Bank 2017). OECD Principles for PPPs There are three principles that underpin the OECD guidelines and that should guide the endeavor to structure PPPs between SOEs, DFIs, and the private sector (OECD 2012). A clear, predictable, and legitimate institutional framework that is supported by competent and well-resourced authorities: political leadership must accept the costs and benefits of using PPP and ensure that they are balanced with stability and predictability. Active consultation and stakeholder engagement must be integral to the process. Institutional roles must be clearly specified, including a sound procurement process; implementation of the PPP; fiscal and budgeting issues; and monitoring and enforcement. Value for money must inform the selection of a PPP: it is government’s responsibility to define and pursue the strategic goals of the PPP, and these must be prioritized and assessed at the political level, including the initial cost assessment, evaluation of the opportunity cost, and a comprehensive cost–benefit analysis. There must be a careful evaluation of which investments will most likely yield the best value for money. Elements to be considered are type of risks transferred to the private partners to ensure value for money; whether the risk appetite for the PPP is sufficiently

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robust; and whether the partners have a track record of good service delivery and business conduct. Fiscal risks must be minimized, and the integrity of the procurement process must be ensured through transparent budgetary processes: The responsible budget authority must ensure that the project is affordable and the investment sustainable. The investment expenditure budget, including assessing contingent liabilities, should be based on mediumand long-term fiscal projections, with regular updates. In addition, transparency is required in the budget process, documentation should disclose all costs and contingent liabilities, and special attention should be given to budget transparency of the PPP covering the entire public sector.

Policy Recommendations It is useful and important to return to and recapitulate the strategic context of the NDP and the role SOEs and DFIs are expected to play in different aspects of the economy. SOEs and DFIs provide critical economic infrastructure and services required to generate economic growth, as well as to create conditions for employment, and provide public goods like water, sanitation, energy, and transport. At a fundamental level, the economic infrastructure and services provided by SOEs and DFIs are the catalysts and drivers of inclusive development and social and economic transformation. However, as witnessed in the last decade, non-performing SOEs and DFIs have become a binding constraint on achieving government’s development goals. There is great potential for structural reform, and the establishment of the Presidential State-Owned Enterprises Council (PSEC) provides an institutional vehicle for driving this process, most crucially, on the one hand, with respect to effective SOE and DFI governance and rationalization and, on the other hand, crowding in the private sector. Below, the chapter advances two clusters of key recommendations, primarily aimed at the PSEC, since it is chaired by the President and he represents the political center of gravity for the work of the Council. Recommendation: Cluster One The PSEC should appoint Task Team One from among its ranks to undertake the following:

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Study the recommendations of the PRC Report, but focus on developing a long-term strategy for SOEs and DFIs that is aligned with the vision and objectives of the NDP and the recovery of the economy. Such a strategy should be the foundation for developing and presenting modalities to the PSEC for a single and overarching legal framework to govern all SOEs and DFIs, in consultation with the relevant ministries and departments. The strategy and modalities should focus on the necessary mechanisms—legal, institutional, policy, and administrative—for consolidating and rationalizing the number of SOEs. This exercise should be informed by two considerations: firstly, a definition of strategic sectors that are relevant to the NDP vision and objectives and economic recovery; and secondly, how such strategic sectors promote collaboration and synergies between SOEs and DFIs, particularly with reference to the NDP’s Medium-Term Strategic Framework for 2014–2019 (see Footnote 5). Recommendation: Cluster Two The PSEC should appoint Task Team Two from among its ranks to undertake the following: Propose terms of reference for setting up a PPP Unit in the Presidency. Such ToRs should aim to develop a functional and implementable framework of methods and principles that are relevant to a three-way partnership between SOEs, DFIs, and the private sector, and which draw on the OECD guidelines. Initiate a broad process of consultation among the NEDLAC social partners that will encourage their participation in and support of the work of the PPP Unit. Such consultation is important for ensuring that the partnership is affordable and institutionally coherent; that it represents good value for money; and that PPPs are treated transparently in the budget process.

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Conclusion As constituted, SOEs and DFIs are expected to be functionally efficient organizations, comporting with high standards and principles of ethical conduct and prudential corporate governance, acting accountably and transparently in the use of public resources and, above all, generating real and meaningful outcomes for the benefit of the poor and marginalized. Indeed, the COVID-19 pandemic has exposed how wide and deep the cracks are in the country’s economic and social predicament. It is something of a paradox that South Africa has engineered a complex amalgam of strategies, measures, and policies that are meant to reflect the ethos of a developmental state, yet the traction of this complex amalgam has been negligible and rendered nugatory, mainly because of political paralysis (Pillay 2007; Terreblanche 2009). The country has now reached an economic and social inflection point because of its recessionary environment, exacerbated by the effects of the COVID-19 pandemic. This chapter has made recommendations that it considers salutary for repositioning SOEs and DFIs, especially in relation to the possible multiplier effects that could flow from engaging with the private sector through better alignment, complementarity, and coordination. However, giving effect to the recommendations will require astute leadership and the political will to address the forces of economic and social dislocation. There are clear advantages for consolidating SOEs and DFIs under a single rubric and bringing in the private sector through PPPs. It will allow for a clearer articulation of public policy; improve capacity building within state institutions; provide a better matching and synergizing of mandates and policy priorities; improve prospects for integrated planning; and enhance collaboration and coordination between the public and private sectors. Finally, it is worth drawing on Milton Friedman (1962, 87; emphasis added) regarding how times of crisis can provide great opportunities for systemic change. As he observed to his fellow monetarists: “Only a crisis— actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

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CHAPTER 9

Energy Transition for Post-COVID-19 South Africa Iraj Abedian and Nthabiseng Tsoanamatsie

Introduction As South Africa emerges from the COVID-19-induced economic crisis, the most strategic objective would be to relieve the economy and its growth path from the stranglehold of access to sustainable and competitive power generation. Even before the pandemic struck, the country had already recorded a technical recession, its second in just two years, partly due to Eskom’s inability to supply adequate and reliable electricity. This, in turn, has led to a considerable slump in business confidence and disruptions to the economy, culminating in a sustained fall in aggregate investments. Unless the energy-constraint issue is resolved in a credible and effective manner, the country will fail to revive growth and create

I. Abedian · N. Tsoanamatsie (B) Pan-African Capital Holdings (Pty) Ltd, Johannesburg, South Africa e-mail: [email protected] I. Abedian e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_9

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jobs in the short term, and will continue to underperform its potential in the medium to long term. South Africa’s transition to renewable sources of energy will not only form a major and important part of the country’s ability to generate sufficient and competitive energy, but will also ensure a meaningful move toward environmental sustainability. This requires the right policies to be put in place and executed, such as the liberalization of the energy-generation sector. President Cyril Ramaphosa has committed South Africa to implementing a “Just Energy Transition”1 (JET). JET is a concept that encapsulates the pursuit for the double objective of becoming more environmentally sustainable with regard to the production and use of energy, as well as the promotion of equity and justice, particularly in energy use and benefits accrued through production. The International Labour Organization ([ILO] 2018) points out that the first mention of the JET can be attributed to a trade unionist during the early 1990s who was calling for support for workers affected by environmental protection policies. The ILO (2017) contends that transitioning toward more environmentally friendly sources of energy has the potential for a significantly positive effect on the labor market, even though some existing jobs may be substituted or eliminated. It also shows that many existing jobs will undergo a transformation, with a redefinition of both work and skills. JET is therefore important, but even more so in the South African case due to the country’s triple malaise of high unemployment and inequality, as well as high rates of poverty. Hence, it is vital that the transition be managed carefully and fairly, both so that the problems are not exacerbated, and also to ensure that the collateral adverse effects on job losses are minimized. Access to power is a vital prerequisite for poverty alleviation, an improved lifestyle, better educational outcomes, and much improved health status. The South African Constitution (1996) states that “energy should be made available and affordable to all citizens, irrespective of geographic location. The production and distribution of energy should be sustainable and lead to an improvement in the standard of living of citizens” (Department of Minerals and Energy 2003). To this end, 1 A panel of experts was convened by the International Labour Organization’s (ILO) Governing Body in 2015 to develop non-binding guidelines for a just transition toward environmentally sustainable economies and societies for all.

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it is pertinent to note that recent technological progress in renewable energy industries has made it feasible and commercially viable to decentralize electricity generation for a large number of consumers, be they households, commercial entities, or service providers in diverse sectors. In effect, for a considerable segment of the national demand for energy, it is now possible, indeed preferable, to locate energy-generation facilities as close as possible where they are needed, avoiding the conventional centralized generation-transmission model. By doing so, apart from reducing the cost of energy delivery, we avoid the environmental cost of the generation-transmission model. This paper highlights a number of important factors that need to be considered in order for South Africa to achieve meaningful energy transition. The paper’s first main argument is that macroeconomic considerations related to the balance of payments need to be assessed seriously as South Africa makes its energy transition. This is vital to avoid the country’s energy sector becoming import-intensive from its current state of being largely energy self-sufficient. The second key point relates to adequate planning that, in turn, will ensure that South Africa reaps maximum socioeconomic benefits from the transition. The third is the need to address the effect of the transition on municipal revenue, hence the need to ensure this does not become an obstacle to the energy transition, while at the same time showcasing ways municipalities can benefit from the transition. Finally, the paper argues that South Africa’s long-term prosperity is linked closely to the continent’s development and integration. As such, it assesses the efficacy of the Southern African Power Pool and the structuring of relations with neighboring countries to enhance security of access to new energy sources. This paper also offers a number of interrelated proposals for achieving the imperative goal of systematically transitioning into sustainable renewable energy generation in order to underpin the revival of the economy. First and foremost, there needs to be a speedy liberalization of the sector in order for the transition to be fast-tracked. Sluggish and piecemeal transition will materially diminish its overall macroeconomic impact. It is essential that there is appropriate planning and coordination across SOEs and the banking sector for the energy sector to be a pivotal player in promoting growth and economic sustainability. South Africa needs to separate the energy sector into its various segments and deal with power supply differently in the diverse segments. For example, renewable sources of energy and other forms of power generation can credibly and reliably

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deal with households’ and commercial outlets’ power needs. This will leave Eskom to focus on baseline energy and ensure that its power supply is reliable and cost-effective. This paper is divided into three main sections. The first comprises a high-level review of the energy sector’s key topics and analysis, putting the main objectives into context. This includes looking at the importance of energy in South Africa as a modern economy, along with the damage done to the economy due to unreliable energy supply over the past twelve years. The section also presents an analysis of the technological changes taking place in the sector, along with the environmental requirements. The second section deals with the paper’s main arguments, which explore options and analyze the key political economy considerations. The third, and final, section summarizes the conclusions and draws out key policy recommendations.

The Importance of Electricity to the South African Economy Electricity is vital to modern economies, and empirical evidence suggests that it has a material and positive causal effect on economic growth and development. This is evident in statistics of the International Energy Agency that show a strong correlation between a country’s electricity consumption and its wealth, while at the same time indicating a positive correlation between a lack of access to modern energy services with more poor people, i.e., people who live on less than US$2 per day (Mahfoudh and Amar 2014). Specific to South Africa, the empirical results showcase that there indeed is a distinct bidirectional causality between electricity consumption and economic growth in the country (Odhiambo 2009). Energy is recognized as an indispensable factor of production, with continuous supplies necessary for the maintenance of economic activity and for growing and developing the economy (Stern et al. 2019). This is particularly pertinent for South Africa’s mining sector, manufacturing, and pharmaceutical-petrochemical industries. Any kind of disruptions to such activities are disproportionally costly. At the same time, it has been shown that, as economies develop and average per capita incomes rise, there is an inclination to use energy carriers that are of higher quality, more productive, more flexible and cleaner, particularly in relation to electricity. In South Africa, data from Statistics South Africa ([Stats SA] 2019) shows that electricity made up

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only 57.5% of total energy used for cooking by South African households in 2002, but this had increased significantly, to 76.8%, in 2018. During this period, gross domestic product (GDP) per capita also increased, from R45 798.00 to R55 595.00, as per data from the South African Reserve Bank ([SARB] 2020). Similarly, comparing the total final consumption of energy from coal and electricity from 1992 to 2017 shows that, while the final consumption of coal declined by around 26%, final consumption of electricity increased by just over 58%. Studies highlight that electricity offers more advantages over other energy carriers, providing more efficient lighting and allowing for the more productive organization of manufacturing, while there are various high-value uses for which electricity has no substitutes, such as telecommunications and computing (Stern et al. 2019). This is particularly significant in the age of the 4th Industrial Revolution (4IR) and the rising digitalization of the economy. When doing an analysis of electricity and its significance to economic development, it is similarly vital to examine what it means to develop an economy in a more holistic and meaningful manner that benefits everyone. Spies (1991) argues that what is considered to be economic progress is likely to differ for economies at different stages of development. As such, during earlier stages of economic development, issues concerning basic needs such as housing and energy for household purposes are typically of significant importance to societies. In addition, qualitative changes, such as improvements in economic development, are also of priority to some societies. South Africa, an upper-middle-income country,2 prioritizes the alleviation of poverty as well as the lowering of the country’s excessive income inequality, as highlighted in the country’s main economic policy document, the National Development Plan (NDP) 2030 by the National Planning Commission (2012). Despite commendable progress made in electrifying the nation, especially since 1994, there are still poor households that are without electricity, and this lack of access exacerbates the lack of quality of life of the citizens. Although the ratio of South African households that are connected to a mains electricity supply has improved significantly from 2002 (76.7%) to 2018 (84.7%), there is a sizable proportion of the population that is still not connected. The Integrated Resource Plan (Department of Mineral Resources and Energy 2019) indicates that three

2 According to the World Bank Country Classifications.

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million households are without access to grid-based electricity. This is important because it further highlights that electrification through nongrid connections has not yet provided an energy source that is as effective as grid connections. Electricity availability for all is crucial. Mahfoudh and Amar (2014) point out that empirical studies have demonstrated that, at the micro-level, access to electricity appears to be one of the key services for the improvement of poor individuals’ welfare.

Consequences of Unreliable Electricity Supply South Africa still relies heavily on Eskom for electricity supply (over 90%), and the utility company’s many challenges, especially since the end of 2007, have had a profoundly negative effect on the South African economy. In addition to the substantial financial burden, the state-owned entity (SOE) has been placing on the fiscus (Budget 2020 indicates that, over the past 12 years, the state has allocated R162 billion to financially distressed SOEs, with the bulk of it—82%—allocated to Eskom), Eskom’s infamous scheduled power cuts (normally referred to as “load shedding”) have become a major disruptor of economic activity. At the same time, the inadequate power supply has been a major source of the plunge in South Africa’s business confidence, which in turn has negatively affected investments. The NDP 2030, drafted in 2012, already highlighted energy constraints as a major weakness in the South African economy, with this acting as a cap on growth as well as a binding constraint on industrialization. In retrospect, the NDP’s concerns have turned out to be a serious understatement. Quantifying the effect of load shedding on the economy is a complex and multifaceted exercise in terms of economic impact, social impact, and the effects on the country’s brand and governance competence. To illustrate, the SARB (2019) pointed out that the effect varies depending on the severity of the power cuts. Overall, the SARB’s analysis suggests that South Africa’s real GDP growth declines by a statistically significant 0.06% as the intensity of load shedding increases. It shows that load shedding has a marked negative effect on the electricity, gas, and water sector’s real gross value added (GVA). The SARB’s analysis also indicates that mining and manufacturing, which are both electricity intensive, have often been adversely affected the most, followed by the agriculture and transport sectors. It is stating the obvious that factors other than load shedding are also responsible for

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the South African economy’s poor performance over the period 2008 to 2019. The SARB, however, argues that it is not only through the direct effect of load shedding itself that economic activity is hampered, but also indirectly through the negative effect it has on confidence. The frequent and intense load shedding has been cited as one of the significant contributors to the dip in business confidence during surveys. A case in point: following Eskom’s implementation of load shedding during the last quarter of 2019 and the first quarter of 2020, including stage 6 load shedding (shedding of 6000 MW off the national grid) during December 2019, the (BER) business confidence index that had increased in Q4 2019 declined significantly, by eight index points, during Q1 2020. Meanwhile, electricity prices have increased steeply since the first electricity crisis that took place in late 2007. The periods 2008/2009, 2009/2010, and 2010/2011 registered electricity tariffs increasing by approximately 29%, 30%, and 32%, respectively. These sharp increases have placed an added burden on both businesses’ and consumers’ cost structures. Finally, even though the share of GVA of the total economy coming from the electricity, gas, and water sector is relatively small (contributing 4% to nominal value added in Q1 2020) in comparison to most other sectors, its influence on other sectors is significant. In effect, this is an enabling contributor to all other sectors within the economy. A case in point is a study by Bee (2016), in which electricity is shown to be a significant factor in manufacturing production. The study suggests that electricity’s output is nearly three times larger than its input share. In addition, it indicates that electricity outages increase the costs of labor for firms without standby power, and decrease the manufacturing exports of firms. Overall, the study finds that, for firms in general (those with and without backup power), electricity outages are the most frequently cited constraint on manufacturing growth in developing countries.

Environmental Requirements and Technological Changes Taking Place in the Electricity Sector The drive toward more renewable sources of energy is intensifying globally, with increasing investment going toward these technologies (Frankfurt School-UNEP Centre/Bloomberg NEF 2020). As the world still grapples with the effects of the COVID-19 pandemic, there have been calls for governments to invest further in renewables as part of

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a recovery that will ensure more sustainable economies. The United Nations Economic Commission for Africa ([UNECA] 2020), maintains that African economies should build back strongly following the COVID19 economic crisis. It recommends that this would involve placing sustainable energy investments central among the countries’ recovery goals, and laying a strong foundation for sustainable development by linking it to recovery investment. The World Economic Forum’s ([WEF] 2020) flagship report on energy transition3 suggests that, because of the more uniform distribution of renewable sources, especially wind and solar energy, steering economies toward renewable energy to a greater extent will not only reduce inequality in energy consumption, but could also lead to more energy security. This would be a good case for the use of more renewable energy in South Africa as it is likely to lead to a more reliable supply of electricity, which will benefit the economy. South Africa has long recognized the need and therefore expressed the desire and intention to transition toward more sustainable sources of energy. The NDP 2030 highlighted at the time of its drafting that, although South Africa was only the 27th largest economy globally, it was the 12th largest emitter of carbon dioxide, mainly due to its dependence on carbon-based fuels. During his 2019 State of the Nation Address (SONA), President Cyril Ramaphosa acknowledged that, “together with all the nations of the world, we are confronted by the most devastating changes in global climate in human history. The extreme weather conditions associated with the warming of the atmosphere threaten our economy, they threaten our lives and the livelihoods of our people, and— unless we act now—will threaten our very existence” (South African government 2019). South Africa is already being affected adversely by the effects of climate change, especially in the form of increased temperatures and water vulnerability. This challenge is also likely to have a negative effect on the country’s energy generation (National Treasury 2020). The National Climate Change Adaption Strategy (Department of Environmental Affairs 2017) shows that, because more than 90% of the country’s electricity is derived from coal-fired generation and this type of electricity generation

3 Fostering Effective Energy Transition.

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(together with coal mining) is highly water-intensive, the climate changeinduced stress on water resources will most likely place the country’s energy security at risk. As such, the policy document argues that South Africa needs to adapt to this possible scenario, hence it would appear that there is another reason why South Africa should rely even less on coalgenerated electricity and add more to its renewable energy generation. The Department of Energy (2019a) therefore has announced that the goal is to improve South Africa’s energy mix by having 30% clean energy by 2025, all within a transformed and sustainable energy sector. This would be in line with the National Strategy for Sustainable Development and Action Plan (NSSD 1), 2011–2014 (Department of Environmental Affairs 2011). Priority 5 of the Action Plan states that it is necessary to cut the country’s greenhouse gas emissions in line with targets approved by Cabinet, with emphasis particularly on the energy sector, as it accounts for over 70% of the country’s emissions. Similarly, it requires that South Africa reduces its dependence on fossil fuels while enhancing a secure electricity supply. A move toward less carbon-intensive electrical production is specified in the NDP 2030, with the document indicating that the objective is to have at least 20,000 MW of renewable energy contracted by 2030. Notably, South Africa has signed the Paris Agreement on Climate Change and has ratified the agreement, as pointed out in the Integrated Resource Plan (IRP) (Department of Mineral Resources and Energy 2019). This basically means that the country has committed to reducing its greenhouse gas emissions in accordance with the agreement. South Africa has several other policies to minimize environmental damage (e.g., the National Environmental Management Act) and to pursue more sustainable economic growth and development. Great advancements have been made and continue to be made in the clean energy and/or renewable energy space. The IRP (Department of Mineral Resources and Energy 2019), South Africa’s electricity development plan, acknowledges that the policy document has been developed in an environment characterized by rapidly evolving energy technologies.

The Growing Tide of Renewable Energy Technologies According to the Renewable Energy Association (2009, in United Nations Conference on Trade and Development [UNCTAD] 2010), renewable energy technologies are those technologies that provide energy

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making use of energy sources that are as benign as possible in their effect on the environment and do not exhaust the earth’s natural resources. In essence, they are sustainable in that they can be managed so as to ensure they can be utilized indefinitely without much environmental degradation. Overall, global demand for energy has grown with the advancement of economies and an increasing population. At the same time, there has been a shift in the energy mix—with more movement toward sustainable sources. The cumulative increase in installed renewable energy in South Africa has increased rapidly since 2013. This followed the introduction of the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) by the Department of Energy in 2011. In addition to the growing need for environmental consideration when generating energy, improvements in technology and the decline in the cost of renewables have been the driving factors in the growth of renewables. According to UNEP (Frankfurt School-UNEP Centre/Bloomberg NEF 2020), the share of renewable technologies (excluding large hydro) increased from just 5.9% in 2009 to 13.4% in 2019. This report also showcases that technological improvements and economies of scale have led to the increasingly declining cost of wind- and solar-generated electricity. There was a significant rise in the adoption of wind and solar electricity technologies from 1980 to 2019, which was over 2000% and over 300%, respectively. During the second half of 2019, the average cost of solar PV was approximately 83% lower than it had been a decade before, while the cost reduction during the same period was around 49% and 51% for onshore and offshore wind, respectively. To further illustrate the extent to which the installation costs of renewables are declining—in 2019, new renewable power capacity added (excluding large hydro) was 20 GW more than it was in 2018, yet investment in renewable energy capacity was only 1% more than in 2018. This indicates that, due to rapidly falling renewable energy technology costs, the marked growth in the sector is being achieved with less investment. Furthermore, although wind technology has been ahead of solar in terms of installed generation capacity, the rise in solar has been much more rapid. This is corroborated by the International Energy Agency ([IEA] 2018), who argue that increasing the competitiveness of solar PV will push its installed capacity past that of wind before 2025, past hydropower around 2030, and beyond that of coal before 2040.

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Led by the Department of Energy, the IRP (SA’s National Energy Plan) is intended to drive all new development of generation capacity. Issued under Sect. 34 of the country’s Electricity Regulation (Act No. 4) of 2006, ministerial determinations enable the Minister to determine the new energy capacity required. Therefore, ministerial determinations give effect to components of the planning framework of the IRP by facilitating the procurement of the necessary electricity capacity. Up until 2016, and in four separate ministerial determinations, the Minister had determined that 14,725 MW of power be procured from renewable energy. The determinants have been implemented in rolling bid windows (BW), with seven bid windows successfully completed, all representing 44% of the already determined capacity of 14,725 MW (Independent Power Producers Procurement Programme [IPPPP] 2019). Bid Window 4 is expected to bring about 2,210 MW into capacity, with wind making up the bulk of power procured, followed by solar. During October 2020, the Minister gazetted amendments to the Electricity Regulations on new generation capacity, which are to open a number of BWs, including Bid Window 5, of renewable energy. Of the determined capacity, over half of the total 11,813 MW of power will be generated from renewables, i.e., 6,800 MW from solar photovoltaic (PV) and wind.

Key Macroeconomic Considerations as the Country Makes Its Energy Transitions South Africa has been largely self-sufficient in terms of energy due to coal being the chief source of energy, and the country has an abundance of coal reserves. Telkom (2020) indicates that the country’s marketable coal production, which averages 224 million tons annually, makes South Africa the fifth largest producer globally. Coal makes up more than twothirds of the country’s total energy supply, while 14% is from crude oil (of which almost 100% is imported (99.7%)). Approximately 90% of the country’s electricity is supplied by Eskom, which in turn produces 91% of the electricity generated, exports 6%, and imports 3% (in 2016). Eskom, in turn, uses 83% of the coal (2018) to generate electricity (Department of Energy 2019b). Meanwhile, the Minerals Council of South Africa (2020) posits that South Africa’s coal reserves are sufficient to meet the country’s needs for more than a century. All in all, this illustrates that South Africa’s energy sector is not import-intensive, mostly due to the country’s coal resources and its reliance on coal for electricity generation.

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This dynamic has benefited South Africa’s balance of payments, i.e., being largely energy self-reliant and only importing a smaller fraction of the country’s energy requirements. Over and above this advantage, analysis comparing energy-exporting and energy-importing countries (WEF 2020) shows that fuel-exporting countries’ performance as regards the energy sector’s contribution to economic growth and development is much better relative to that of energy-importing countries. This highlights that access to resources at affordable prices plays an important role in the country’s energy dynamics and development. Besides the availability of resources and goods prices, technological availability and expertise are other important factors to consider when making decisions about a country’s national energy mix. Throughout the implementation of the REIPPPP in 2011, government sought to drive sustainability by encouraging local ownership and local manufacturing. The Department of Energy (2018) shows that the REIPPPP procurement processes promoted more local content by setting minimum local content thresholds. Thresholds were gradually raised across bid windows. Even though the thresholds have been reached, the desired targets are not being attained. For instance, the Department of Trade and Industry’s ([dti] 2015) roadmap for localization envisioned a local content level of 68.6% in the wind industry, but this was not attained during BW1 to BW4. Having a strong manufacturing base in the renewables sector will help achieve South Africa’s development goals and drive a healthy balance of payments. The Department of Energy (2018) indicates that considerable progress had already been made in this arena through the establishment of 12 new industrial facilities that are able to supply utility-scale projects. This pushed exports of solar PV modules from a low base of R0.06 billion in 2014 to more than R1.3 billion in 2016 as South Africa became an important participant in PV panel assembly. Because of this development, South Africa’s exports of PV modules began to offset its imports. With regard to wind power, the dti (2015) argues that local manufacturing of main wind turbine components is still limited, while the value chain in South Africa is dominated by global industry players. Wind power generation also involves large and heavy pieces of equipment that are complex and costly to transport, and local manufacturing in wind is more dependent on the local market for regular orders than similar PV supply chain plants. This appears to suggest that

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the solar PV manufacturing industry has an advantage over wind manufacturing in this regard, and has greater potential to benefit the balance of payments, especially through exports. Finally, there has been a significant rise in investments directed toward renewables globally. According to UNEP (Frankfurt SchoolUNEP Centre/Bloomberg NEF 2020), close to US$2.7 trillion went into building new renewables capacity worldwide in the decade from 2010 to 2019, with solar and wind capturing US$1.4 trillion and US$1.1 trillion of the investment, respectively. Furthermore, in 2019 alone, US$282.2 billion was invested in new renewables capacity (excluding large hydro). REN21 (2020) shows that investment in renewables in 2019 was three times that of investment in coal, nuclear, and natural gas combined. Other initiatives to encourage more environmentally benign growth and investment have resulted in the creation of investment vehicles, such as the green bond that was first issued by the World Bank in 2008. South Africa, especially with its highly developed financial sector, is well placed to benefit from these funds for the development of its renewable industrial networks. In its March 2017 report, the Independent Power Producers Procurement Programme (IPPPP 2017) said that there had been a total investment (both equity and debt) of R201.8 billion in the Programme since its inception, of which 24% was foreign investment. This also represented an increase of over R56 billion from the reported R145.5 billion in investment as of March 2015. Nonetheless, the latest report, which came out in June 2020, shows that the Programme has so far attracted a total of R209.7 billion in investments. This represents additional investments of only R7.9 billion since 2017, which highlights a marked decline in investment growth and can be attributed to the slowing pace of the Programme.

Socioeconomic Benefits to be Derived from the Energy Transition South Africa’s scourge of unemployment was worsening before the COVID-19 pandemic (the unemployment rate had reached 30.1% in Q1 2020, following 29.1% during Q4 2019). To revive the economy and also help create employment, the President embarked on an investment drive, including an infrastructure investment initiative that has largely

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involved attracting private capital through initiatives such as the Sustainable Infrastructure Development Symposium of South Africa (SIDSSA). It has been argued that investment in long-term infrastructure during economic crises can drive economic growth and generate employment (WEF 2020). Therefore, choosing to invest in renewable energy infrastructure will not only assist South Africa in exiting the current economic slump, but is bound to lead to more sustainable economic growth over time and generate much-needed jobs. Globally, employment in renewables has been rising. REN21’s 2019 Global Status Report shows that there were approximately 11 million people employed in the renewables energy sector worldwide in 2018. This was around 4.5 million more people employed in the sector than the approximately 6.5 million people employed in renewables in 2013, according to REN21’s 2014 Report. The largest employers in renewables in 2018 were solar PV, biofuels, hydropower, wind power, and solar heating and cooling. A similar trend in jobs in the renewables sector can be observed in South Africa. According to the Department of Energy (2018), 31,207 South African citizens were employed in the construction and operation of REIPPs during the fourth quarter of the 2016/2017 financial year, a much higher number than the 2,545 individuals employed in the sector during the first quarter of the 2013/2014 financial year. The Department of Energy (2018) also highlights that the benefits of employment creation are not limited to the REIPPPP, as localization means that the entire value chain is affected, resulting in job creation both directly and indirectly. For instance, with regard to small-scale solar PV and related services, job creation opportunities encompass the entire supply chain, as is the case with the manufacturing and assembly of PV panels and components. This showcases the great potential for the sector to create more jobs in the South African economy. An important feature of the renewables sector that could lead to a sizable positive effect on South Africa’s socioeconomic dynamics is that, unlike the current electricity generation system dominated by Eskom and coal, which is highly centralized, renewable electricity generation has the potential for significant decentralization. The sun is an abundant resource across South Africa, therefore solar-powered generation can be implemented across the country, even on a small scale. According to the United Nations Economic and Social Commission for Asia and the Pacific (unescap), decentralized energy systems are a fairly new approach

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in the energy sector in most countries and are characterized by energyproduction facilities closer to sites of energy consumption. In essence, this means a move away from the development of large, central power stations that have to transmit generation loads across long distances and distribution lines to consumers. In South Africa, since end users of electricity are spread across the vast country, placing energy generation in a decentralized position can lessen both transmission and distribution inefficiencies, together with the related economic and environmental costs. There are other major benefits that can also be derived from this model. Because economic activity related to electricity generation can be spread across the country, those areas in which new generation capacity will be installed will benefit economically. Furthermore, jobs related to the sector will also be spread more evenly across the country, creating more employment opportunities in places that might not previously have benefited from the sector. This is especially important, as there currently is great disparity in economic activity, including job opportunities, across South Africa’s nine provinces, as well as between rural and urban areas.

The Fiscus South Africa’s fiscal status has been deteriorating for the past decade, and the response to the COVID-19 pandemic has caused further and substantial deterioration. Budget 2020 (presented in February) painted a picture of a fiscus that was already in distress. Presented four months following Budget 2020, Supplementary Budget 2020 showcased the effect of the COVID-19 pandemic on the fiscus—a catastrophic effect on government finances in the form of an estimated R300 billion tax loss, with an associated accelerating debt-to-GDP ratio exceeding 82%. Eskom’s inability to supply the country with adequate electricity, and the resultant negative effect on economic growth both before and during the pandemic, has had a profoundly adverse effect on the tax base. Secondly, the constant bailouts that government has provided the SOE have had a direct negative effect on the fiscus. Diversifying South Africa’s energy base further by including the generation of more renewable energy could have a positive effect on the fiscus through at least two channels. The first is by positively affecting economic growth and development and hence the growing tax base. The second is by the mere fact that investment in renewable energy plants is largely

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undertaken by the private sector. As indicated previously, total investment in the IPPPP amounts to R209.7 billion, and this is private investment of which 20% is foreign. Eberhard and Naude (2017) also show that, at the time of writing, the majority of the preferred program bidders had elected to finance their projects using a combination of project finance and equity, while the rest opted to use corporate finance. This confirms that the IPPPP has allowed for the building of new infrastructure without depending on the fiscus. The only impact on government finances comes from a low-risk contingent liability that guarantees Eskom’s performance as an off-taker. Therefore, the way that the REIPPPP system works means that investing in renewables has minimal impact on the fiscus, unlike the country’s reliance on Eskom, which has increasingly become reliant on government support.

Municipalities and Energy Transition South Africa’s local government as a provider of basic services plays a significant role in the electricity supply of households. With Eskom responsible for the bulk of electricity generation and transmission in the country, municipalities are largely responsible for electricity distribution in their areas. The Department of Energy (2018) shows that municipalities provide as much as around 78% (Free State) and 71% (Limpopo) to around 61% (Gauteng) and 59% (Mpumalanga) of electricity distribution across the country’s provinces. It therefore is evident that the move toward more renewable energy generation, for which households and businesses will be both producers and consumers of electricity, would mean a shift in this generation-to-distribution dynamic. This, of course, will present both opportunities and challenges for municipalities, with challenges stemming especially from the fact that municipalities’ income would be affected. Many municipalities use electricity as a cash generator in their portfolio of services delivered. Growth in alternative sources of electricity, i.e., sources besides Eskom, means that municipalities are bound to lose sales and therefore revenue. Sustainable Energy Africa (2020) highlights that, because the structure of South Africa’s municipal fiscal framework is such that municipalities have to supplement their grant funding (from national government) by generating own revenue through means such as the sale of water and electricity, reduced sales result in lower revenues.

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A study by Shumba et al. (2019) also shows that the uptake of smallscale embedded generation (SSEG) is likely to have a significant impact on municipal revenue. They, however, suggest that concerns related to loss of revenue are not valid reasons for resisting the adoption of initiatives such as the SSEG. They argue that it is possible to mitigate negative effects on revenue by undertaking “cost of supply” studies, as required by the National Energy Regulator of South Africa (NERSA), in order to adequately set SSEG tariffs. Nonetheless, they do state that stakeholders still need to deal with the potential longer-term decrease in revenue. Given this dynamic, municipal tariff structures will have to be amended. Sustainable Energy Africa (2020) suggests that the most effective strategy to mitigate the loss of revenue, as discussed with electricity departments in metropolitan municipalities, includes implementing an energy charge as well as a fixed charge that would cover distribution costs. It sees this as a way of not only securing the municipal business model, but also encouraging municipalities to promote renewable energy as well as efficiency within their distribution network. It is important to note that a number of municipalities have largely demonstrated the desire and willingness to move toward more renewable sources of energy as part of their plans to become environmentally coherent and to take advantage of evolving technologies. It is indicated that the country’s towns and cities have been engaging actively in various global networks and international initiatives that are dedicated to the development of local solutions in pursuit of sustainable energy. These include, among others, the climate summit for local leaders (and South Africa was well represented), the COP21 hosted in Paris in 2015, where leaders pledged support for a significant increase in renewable energy as well as a reduction in emissions (Department of Energy 2018). Nonetheless, for local government to be supportive of and active in the country’s energy transition, policy has to be enabling and clear. The South African Local Government Association ([SALGA] 2014) insists that clarification of the energy responsibilities at the local level is key to local energy development, and also states that this needs to be coordinated by the association and led by the relevant departments. To further gain widespread support from municipalities, there has to be a focus on opportunities associated with renewable energy—opportunities that would help drive sustainable growth and development at the local government level. South Africa already has examples of innovative ways in which renewable energy can offer solutions to local energy

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problems, while showcasing the potential that these can have in driving local economies. These include, among others, the “SolarTurtle,” a South African innovation that offers a community solar plant and spaza shops that are especially suitable for unelectrified, rural communities. Local governments also have the opportunity to attract renewable energy businesses, as well as to become more attractive to investors due to increased reliability of electricity supply, as well as the flexibility of being able to produce or source their own electricity. There thus is a great opportunity to increase municipalities’ tax bases. SALGA (2014) also argues that, because capital investment for embedded generators is borne by owners instead of government and the potential for job creation is significant, their promotion is likely to be very beneficial for municipalities.

Regional Energy Dynamics and Opportunities South Africa’s long-term prosperity is linked closely with the continent’s development and integration. Despite much political hype, and notwithstanding some measurable progress over the past 25 years, the reality is that Africa’s industrialization and integration remain far too slow, and way below their potential—South Africa’s engagement with the continent needs refocusing and redefinition. A major way this is being pursued in the energy sector is through the Southern African Power Pool (SAPP), established in 1995, which has numerous objectives that can be summarized as follows—increasing energy security in the Southern African Development Community (SADC) region through regional cooperation. Despite this, analysis indicates that the efficiency of the organization has been limited by a number of factors, which have resulted, among others, in countries in the (SADC) region engaging in limited multilateral power supply agreements. Montmasson-Clair and Bhavna (2017) show that the share of electricity traded regionally was only 14% in 2014/2015, in contrast to bilaterally traded electricity at 86%. A number of issues have been highlighted that hinder the optimal effectiveness of the SAPP. These include, among others, policies and regulations—although an effort has been made to develop harmonious policies and a regulatory framework, these still have no formal legal status as they remain voluntary. Inadequate infrastructure, such as transmission infrastructure, has also been cited as a major hindrance to the SAPP goals,

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while coordinated implementation is deemed inadequate (MontmassonClair and Bhavna 2017). All of these, of course, affect the desirability of investments in other sectors in the region. Hence, for the SAPP to truly be effective, these issues would need to be resolved, and South Africa— as the largest and most sophisticated economy in the SAPP—needs to take the lead. There is also a need for a private–public sector policy and coordination forum to promote investment and collaboration within the region. South Africa needs to actively pursue opportunities to expand the regional energy pool, and many prospects are available. As an illustration of potential prospects: an immediate and much-needed opportunity is the case of establishing an energy-petrochemical complex between Angola and South Africa—this could establish a sub-continental hub of petrochemical and related industries. Angola, also the continent’s second biggest oil-producing market, has over the past years implemented policies and reformed its business environment to become more attractive to investors. World Oil (2019) points out that South Africa, sub-Saharan Africa’s largest refiner, has planned additional refining and petrochemical units and, as such, these would require crude oil and natural gas supplies that are not available domestically. Ultimately, this is an opportunity that would further drive regional integration while benefiting the region’s power pool.

Conclusion and Policy Recommendations This paper clearly highlights the overriding need for South Africa to systematically and without vacillation transition to sustainable renewable energy generation in order to contribute toward the much-needed revival of its economy. Achieving this key objective goes beyond the notion of the need to restructure Eskom, important as this is in its own right. Technically, South Africa needs to separate the energy sector into its various segments and deal with power supply differently in the various and diverse segments. For example, solar and other forms of power generation can credibly and reliably deal with households’ and commercial outlets’ power needs. By relieving Eskom of the roughly 40% of national demand that comes from households and commercial outlets, the SOE can then focus on baseline energy and ensure that its power supply is reliable and cost-effective.

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With appropriate and competent planning and coordination across SOEs and the banking sector, it would be possible to change the dynamics of South Africa’s energy sector within 24 months so as to make it a pivotal player in promoting: Industrialization via manufacturing of the required accessories for the solar sector; Large-scale investments of over R5 billion within the first 12 months; Job creation with a large potential for employment creation; Opportunities for upskilling and reskilling many young job seekers. Therefore, with careful coordination and appropriate funding of the required manufacturing operations, South Africa can increase its growth further. When renewable sector manufacturing is ramped up through solar panels and all related accessories, the country will have much potential to generate growth and create jobs. Importantly, such enterprises and their associated benefits could be spread across the land. Moreover, the required technology is readily available, tested, and tried. All these have been demonstrated above. Seen in this light, this sector has considerable potential for underpinning the revival of growth. Assuming a rapid liberalization of the power generation sector, the generation technologies have made it feasible to adopt solar energy options for households and for the majority of small- and mediumproduction enterprises and commercial firms. This has the potential to create a large number of jobs in the manufacturing and service/maintenance segments of this industry. It would be akin to the restructuring that took place in the telecommunications sector nearly 20 years ago. The manufacturing segment of this industry relates to the manufacturing of solar panels, cabling, and all related accessories. To maximize the effect, Eskom and the Industrial Development Corporation of South Africa (IDC) need to collaborate with regard to coordination and policy consistency for the establishment of three to five manufacturing outlets for the production of solar panels and associated fittings. This is a critical piece of an integrated energy policy. Technically, the production of such items needs to precede the policy transition. If not, there is every risk that material and avoidable pressure on the balance of payments would arise due to a sharp spike in imported items. At the same time, opportunities for industrialization and job creation in this segment

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of the market would be lost for good. It is a well-established dictum that careful coordination and sequencing are required between policy intervention, industrial initiatives, and trade policy impact. This is a case in point. If liberalization of the energy-generation sector is not suitably coordinated with the prior establishment of associated industrial production, all the benefits of such a liberalization in the form of job creation, GDP growth, and a more stable macroeconomic environment would be lost to the country. Meanwhile, the financial sector, especially the banking system, needs to provide the required asset-financing facilities to enable willing households, farming and commercial enterprises to install solar generation and storage facilities. It is important to note, despite the apparent takeoff in manufacturing indicated above, that of the original 12 new manufacturing businesses reported at the end of 2015, the Department of Energy (2018), at the time of reporting, said that six had either closed or suspended operations, with operations under review in four and investments that had previously been suspended in five. This highlights the importance of policy stability, long-term commitment and continuity, underpinned by the right policies to help sustain and encourage manufacturing in the renewables sector. Delays in REIPPPP rounds 3.5 and up are cited as having had adverse effects on the newly established local industries. Overall, the importance of these industries lies in their long-term sustainability, and hence their ongoing effect on growth, job creation, and regional integration.

References Bee, E.R. 2016. The Influence of the Electric Supply Industry on Economic Growth in Less Developed Countries. PhD diss: The University of Southern Mississippi. Department of Energy. 2018. State of Renewable Energy in South Africa 2017. Accessed September 3, 2020. http://www.energy.gov.za/files/media/Pub/ 2017-State-of-Renewable-Energy-in-South-Africa.pdf. Department of Energy. 2019a. Annual Report 2018/2019a. Accessed September 1, 2020. http://www.energy.gov.za/files/Annual%20Reports/DoE-AnnualReport-2018-19.pdf. Department of Energy. 2019b. The South African Energy Sector Report 2019b. Accessed September 1, 2020. http://www.energy.gov.za/files/media/explai ned/2019b-South-African-Energy-Sector-Report.pdf .

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Department of Energy. 2020. Consolidated Aggregated Historical Energy Balances per Commodity. Accessed October 19, 2020. http://www.energy. gov.za. Department of Environmental Affairs. 2011. National Strategy for Sustainable Development and Action Plan (NSSD1), 2011–2014. Pretoria: DEA. Department of Environmental Affairs. 2017. National Climate Change Adaption Strategy. Pretoria: DEA. Department of Mineral Resources and Energy. 2019. Integrated Resource Plan 2019. Pretoria: Department of Mineral Resources and Energy. Department of Minerals and Energy. 2003. White Paper on Renewable Energy. Accessed August 12, 2020. https://unfccc.int/sites/default/files/ sem_sup1_south_africa.pdf. Department of Trade and Industry (dti). 2015. The Wind Energy Industry Localisation Roadmap in Support of Large-Scale Roll-Out in South Africa. Accessed October 20, 2020. http://www.wasaproject.info/docs/WindEnerg yLocalisationStudyJan2015.pdf. Eberhard, A., and R. Naude. 2017. The South African Renewable Energy IPP Procurement Programme: Review, Lessons Learned & Proposals to Reduce Transaction Costs. Cape Town: Graduate School of Business, University of Cape Town. Frankfurt School-UNEP Centre/Bloomberg NEF. 2020. Global Trends in Renewable Energy Investment 2020. Frankfurt am Main: United Nations Environment Programme https://www.fs-unep-centre.org/wp-content/uploads/ 2020/06/GTR_2020.pdf. Independent Power Producers Procurement Programme (IPPPP). 2015. “An Overview: As at March 2015.” Accessed October 21, 2020. https://www. ipp-projects.co.za/Publications. Independent Power Producers Procurement Programme (IPPPP). 2017. “An Overview: As at March 2017.” Accessed October 21, 2020. https://www. ipp-projects.co.za/Publications. Independent Power Producers Programme Procurement Programme (IPPPP). 2019. “An Overview: As at March 2019.” Accessed October 21, 2020. https://www.ipp-projects.co.za/Publications Independent Power Producers Procurement Programme (IPPPP). 2020. “An Overview: As at June 2020.” Accessed October 21, 2020. https://www.ippprojects.co.za/Publications. International Energy Agency (IEA). 2018. World Energy Outlook 2018. www. iea.org. International Labour Organization (ILO). 2017. A Just Transition to a Sustainable Future. Accessed September 1, 2020. www.ilo.org.

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International Labour Organization (ILO). 2018. Just Transition Towards Environmentally Sustainable Economies and Societies for All. Accessed September 1, 2020. www.ilo.org. Mahfoudh, S., and M. Amar. 2014. The Importance of Electricity Consumption in Economic Growth: The Example of African Nations. The Journal of Energy and Development 40 (1/2): 99–110. Minerals Council of South Africa. 2020. “Coal: Key Facts and Figures.” Accessed October 21, 2020. https://www.mineralscouncil.org.za/sa-mining/coal. Montmasson-Clair, G., and D. Bhavna. 2017. “Regional Integration in Southern Africa: A Platform for Electricity Sustainability.” Trade and Industrial Policy Strategies (Tips) Working Paper, October. National Planning Commission. 2012. “National Development Plan 2030”. Republic of South Africa National Treasury. 2019. “Medium-Term Budget Policy Statement (MTBPS) 2019”. National Treasury, Pretoria. National Treasury. 2020. “Financing a Sustainable Economy.” Technical Paper 2020, National Treasury, Pretoria. Odhiambo, N.M. 2009. Electricity Consumption and Economic Growth in South Africa: A Trivariate Causality Test. Energy Economics 31 (5): 635–640. REN21. 2014. Annual Report, 2014. Accessed September 2, 2020. https:// www.ren21.net/wp-content/uploads/2019/06/REN21_AnnualReport_ 2014_web.pdf. REN21. 2019. Renewables 2019, Global Status Report. Accessed September 2, 2020. https://www.ren21.net/gsr-2019/ . REN21. 2020. Renewables 2020, Global Status Report. Accessed September 2, 2020. https://www.ren21.net/wp-content/uploads/2019/05/gsr_2020_f ull_report_en.pdf. Shumba, T., H. Radebe, J. Dippenaar, and M. Euston-Brown, M. 2019. The Impact of Small-Scale Embedded Generation on Municipal Revenue. Sandton: Association of Municipal Electricity Utilities (Southern Africa) South African Government. 2019. State of the Nation Address. Accessed September 2, 2020. https://www.gov.za/ South African Local Government Association (SALGA). 2014. Local Government Energy Efficiency and Renewable Energy Strategy. Accessed September 9, 2020. https://www.sustainable.org.za/project.php?id=36. South African Reserve Bank. 2019. “Quarterly Bulletin, No. 293”. Accessed July 30, 2020. https://www.resbank.co.za/Publications/QuarterlyBulletins/ Pages/Quarterly-Bulletin.aspx. South African Reserve Bank. 2020. “Historical Macroeconomic Timeseries.” Accessed August 19, 2020. https://www.resbank.co.za/Research/Statistics/ Pages/Statistics-Home.aspx.

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CHAPTER 10

Future of Energy in South Africa and Prospects for Building Regional Value Chains Hany Besada

Introduction Africa is rich in energy resources but poor in its ability to exploit and use them. Many African countries face an energy crisis. Power is inaccessible, unaffordable, and unreliable for most people, trapping them in poverty. Also, the COVID-19 has increased the triple challenges of unemployment, poverty, and inequality. The central argument of this paper is that the problem of poverty, unemployment, and inequality in South Africa can be solved partly by a transition to renewable energy (RE). It claims that RE policy has been ineffective and makes seven sets of recommendations: investing in energy infrastructure; technology transfers; improving access to electricity on a large scale; boosting cross-border power trade; improving the performance of existing utility companies;

H. Besada (B) University of Warwick, Coventry, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_10

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creating regional energy value chains; and helping countries chart lowcarbon growth paths. Understanding where the opportunities for tapping this wealth exist and where shortages occur is fundamental to developing these solutions but, until now, this kind of information has not been exploited (UNEP 2017). In addition, access to sustainable and affordable energy services is a crucial factor in reducing poverty in developing countries (Terrapon-Pfaffn et al. 2014). Several studies also indicate that the creation of regional energy value chains fosters development, since they contribute to job-creation and poverty-reduction benefits. Winkler (2005) notes that investment in renewable energy (RE) and energy efficiency is important to reduce the negative economic, social, and environmental effects of energy production and consumption in South Africa. Currently, renewable energy contributes relatively little to primary energy, and even less to the consumption of commercial energy. The purpose of this paper is to provide an analysis of the available literature and data on the development of renewable energy in South Africa and to suggest policy options for achieving the objectives. The paper is organized as follows: Section two examines South Africa’s energy sector. Section three discusses the drivers and opportunities for renewable energy deployment in South Africa. Section four identifies the challenges of RE deployment in South Africa. This section is followed by a discussion of strategies and policies for RE deployment in South Africa (section five). Section six covers the policy proposals for RE in South Africa, followed by a discussion on the creation of regional energy value chains as a strategy for RE development (section seven). Section eight discusses the steps and measures being taken by South Africa to support green coal policies. Section nine discusses the role of gas in renewable energy transition. This section is followed by section ten, which explores Southern countries’ experiences in transiting to renewable energy, and section eleven provides some concluding recommendations.

An Examination of South Africa’s Energy Sector The 1998 White Paper on Energy Policy for the Republic of South Africa (WPEP’98) was already quite specific: Government policy on renewable energy is concerned with ensuring that an equitable level of national resources is invested in renewable technologies and with addressing

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constraints on the development of the renewable energy industry (Worldwide Fund [WWF] 1986). In line with the 1998 White Paper, the Campaign for a Just Energy Future was launched by civil society representatives in 2016 to promote access to clean, affordable, reliable, and safe energy in South Africa (International Energy Agency [IEA] 2020c). The campaign helped to stop the nuclear deal in 2017 and organized two community Indabas in 2018 and 2019 to discuss ways of shaping and challenging energy policy and decisions, as well as ways of contributing to the Just Energy Transition (JET) debate in South Africa (Halsey and Overy 2019). More can be said about the “just transition” in South Africa. However, the issue of just transition is beyond the scope of this paper and more work will need to be done in this area. This paper is focused on policy options to develop the renewable energy sector in South Africa. According to South Africa’s Department of Energy (DOE), Eskom supplies roughly 95% of South Africa’s electricity and the remainder comes from independent power producers (IPPs) and imports. Eskom buys electricity from and sells electricity to countries in the region. However, South Africa plans to diversify its electricity-generation mix. Currently, about 90% of South Africa’s generation capacity is from coalfired power stations, about 5% from one nuclear power plant, and 5% from hydroelectric plants, with a small amount from a wind station, according to the DOE. South Africa has one nuclear power plant, Koeberg, with installed capacity of 1 940 MW. The country plans to expand nuclear power generation by 9 600 MW by 2030. South Africa’s renewable energy industry is small, but the country plans to expand renewable electricity capacity to 18 200 MW by 2030. Efforts need to be directed toward achieving this sustainable energy target (Mokveld and Von Eije 2018). Reforming and restructuring ESKOM would strengthen the reliably of the power system, support increased industrialization, and help efforts to diversify the energy mix. South Africa is richly endowed with fossil-based and renewable energy sources. However, a continued reliance on oil and gas, along with traditional biomass combustion for energy, will bring considerable social, economic, and environmental challenges such as environmental degradation and climate change (IEA 2020b). Tackling today’s energy challenge therefore requires a firm commitment to the accelerated use of modern, renewable energy sources. This is in line with Africa 2030, the International Renewable Energy Agency’s (IRENA) comprehensive roadmap for

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the continent’s energy transition, which sets out a viable path to prosperity through renewable energy development (IRENA 2015). Renewable energy is driven by a number of opportunities in South Africa, to which we now turn.

Drivers and Opportunities for Renewable Energy Deployment in South Africa Modern renewables eliminate power shortages, bring electricity, and development opportunities to rural villages that have never enjoyed those benefits, spur industrial growth, create entrepreneurs, and support increased prosperity across the country. Modern renewables can also facilitate a cost-effective transformation to a cleaner and more secure power sector (IEA 2020c). Some technology solutions are relatively easy to implement but require an enabling environment, with appropriate policies, regulation, governance, and access to financial markets. However, successful scaling up of renewables requires the adoption of support policies, the promotion of investment, and regional collaboration (IRENA 2015). These commitments are aligned with the energy objectives outlined in the National Development Plan (NDP) 2030, which outlines a future vision for South Africa’s energy sector. In terms of the NDP document, the sector intends to promote, among other things, economic growth and development through adequate investment in energy infrastructure and the provision of quality energy services that are competitively priced, reliable, and efficient, as well as environmental sustainability through efforts to reduce pollution and mitigate the effects of climate change (Republic of South Africa [RSA] 2015). Research conducted by the CSIR shows that “South Africa has the unique opportunity to decarbonize its electricity sector without pain” by dramatically increasing the percentage of renewables in its energy mix. Wind and solar power are now demonstrably the cheapest sources of power in the world and, through smart investments in electric vehicles and transport, the possibility exists to move away completely from the fossil fuel heavy development paradigm that is destroying the world (WWF 2017). In terms of the NDP 2030, South Africa will need clear long-term development strategies to address the challenges of poverty, unemployment, and inequality while managing natural endowments in a sustainable manner. The government of South Africa is prioritizing the issue of

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climate change and has set up a Presidential Climate Change Coordinating Commission, which is chaired by the President. The Commission comprises representatives from government departments and state entities, business organizations, labor, academia, civil society, research institutions, and traditional leadership. The Commission was formed to coordinate and oversee a just transition toward a low-carbon, inclusive, climate change-resilient economy and society. The Commission is tasked with advising on South Africa’s climate change response. This includes mitigation and adaptation to climate change and its associated effects. It will furthermore provide independent monitoring and review of South Africa’s progress in meeting its emissions reduction and adaptation goals (Seale 2021; Gradl and Jenkins 2008). The Integrated Resource Plan (Republic of South Africa 2019) outlines South Africa’s plan for the procurement of generation capacity to 2030. It is an electricity infrastructure development plan based on the least-cost electricity supply-and-demand balance. It supports a diverse energy mix and sets out the following policy decisions that should be implemented to ensure the security of South Africa’s electricity supply: ● Adopt a least-cost plan with the retention of annual build limits (1 000 MW for PV and 1 600 MW for wind) for the period up to 2030. This provides for the smooth rollout of RE, which will help sustain the industry. ● Make provision for 1 000 MW of coal-to-power in 2023 to 2024, based on two already procured projects. Jobs created from the projects will go a long way toward minimizing the effect of job losses resulting from the decommissioning of Eskom coal power plants and will ensure the continued utilization of skills developed for the Medupi and Kusile projects. ● Make provision for 2 500 MW of hydropower in 2030 to facilitate the RSA-DRC treaty on the Inga Hydropower Project in line with South Africa’s commitments contained in the NDP Update to partner with regional neighbors. The Project has the potential to unlock regional industrialization. ● Adopt a position that all new technologies identified and endorsed for localization and promotion will be enabled through Ministerial Determinations utilizing existing allocations in the Integrated Resource Plan Update. This approach is supported by existing electricity regulations. The Electricity Regulations on New Generation

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Capacity enable the Minister of Energy to undertake or commission feasibility studies in respect of new generation capacity, taking into account new generation capacity as provided for in the IRP Update. Such feasibility studies are expected, among others, to consider the cost of new capacity, risks (technical, financial, and operational), and value for money (economic benefits). ● Adopt a position that makes annual allocations of 200 MW for new generation for own use of 1 MW to 10 MW, starting in 2018. These allocations will not be discounted off the capacity allocations in the IRP Update initially, but will be discounted during the issuing of determinations, taking into account generation for own use filed with the National Energy Regulator of South Africa; alternatively, the Regulator (NERSA) (RSA 2019). The policy-adjusted scenario will result in a higher tariff of about 5% by the year 2030 compared to the least-cost scenario. This is the result of the smoothing-out RE rollout plan, which commissions plants earlier than they are actually required by the system, as well as the introduction of coal and hydropower. It should be noted this financial analysis does not take into account the economic benefits of a consistent and predictable RE rollout, the likely regional economic benefits of Inga hydropower, as well as the economic benefits of continued beneficiation from coal (RSA 2019). South Africa has significant potential in renewables. Its biomass, geothermal, hydropower, solar and wind resources are among the best in the world. The abundance and high quality of renewable energy resources render renewables economically competitive, in particular as the costs of renewable technologies are decreasing rapidly. IRENA (2015) further observed that the renewable energy project deals concluded in Africa will deliver power at some of the lowest costs worldwide. Modern renewables also offer great potential to empower local communities. These resources can be harnessed locally on a small scale, contributing to rural development and electrification without the cost of extending national grids to remote places. Local projects also offer economic opportunities to local communities. The rewards accruing to South Africa to meet the challenge will be immense. Modern renewables can eliminate power shortages, bring electricity, and development opportunities to rural villages, spur industrial growth, create entrepreneurs, and support the ongoing lifestyle changes

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across the continent. At the same time, leveraging renewables would facilitate a cost-effective transformation to a more secure and sustainable power sector (IRENA 2020). IRENA, through a number of cooperation instruments, works with African countries to support their efforts to appraise the full potential of modern renewable energies and their benefits (IRENA 2015). The need for renewable energy stems from an input to discussions during the Leaders’ Declaration issued at the G7 Summit held in Elmau, Germany on 7 and 8 June 2015. It was agreed to accelerate access to renewable energy in Africa and developing countries in other regions. It was noted accelerating the deployment of renewable energy would contribute to reducing energy poverty and mobilizing substantial financial resources from private investors, development finance institutions and multilateral development banks by 2020. Improving sustainable energy access in Africa by 2030 can be built on existing networks and initiatives (G7 Summit. 2015). Capacity additions are, therefore, expected to focus on wind energy, hydropower, and solar PV (Roehrkasten et al. 2016). Renewables offer multiple benefits and opportunities in the African context. Firstly, they are domestically available. Net energy importers can reduce import bills by deploying renewables, whereas energy-exporting countries can increase revenues from fossil fuel exports and improve current account balances. In addition, renewables are cost-competitive. Recent data on renewable energy projects in Africa reveal that the levelized cost of electricity (LCOE) from solar PV and wind is significantly below the LCOE of oil-based power plants and, in some cases, even below the LCOE of new coal-fired power plants. Integrating renewables in diesel-based microgrids offers important cost savings (IEA 2020d). In addition, renewables can be deployed much faster than fossil fuel-based power plants. Renewables can also trigger additional economic benefits, such as jobcreation and socioeconomic development, in particular in rural areas. Finally, renewables are core components for any low-carbon strategy and offer important environmental co-benefits, such as improved local air quality and water security. However, accomplishing this requires clear policy signals, an enabling framework of laws, regulations, and institutional setup, as well as viable business schemes to ensure the accelerated deployment of renewables. The challenges facing renewable energy also abound.

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Challenges Facing Renewable Energy Deployment in South Africa The poor financial health of public utilities or SOEs is a major challenge for investment in South Africa’s energy sector as a whole. This is further compounded by the high upfront investment costs of renewable energy projects. In addition, even though South Africa has established policies for the promotion of renewable energy sources in the past decade, the legal and regulatory frameworks often remain patchy and inconsistent. Technical challenges include the availability of resource data, operations and maintenance (O&M) skills at the local level, including repair and replacement, and system integration of fluctuating power from renewable energy sources (Quitzow and Roehrkasten 2016). There also are attempts to entrench Eskom’s monopoly in the energy sector (WWF 2017). Eskom is a vertically integrated utility that controls the transmission infrastructure and is by far the largest electricity generator in the country. The independent power producers (IPPs) are wholly dependent on Eskom for the transmission of the electricity that they generate and can also only sell to Eskom as the sole off-taker. Increasingly, concerns are being raised that Eskom is abusing its position to favor its own investment in new power plants, thereby in essence opposing the government’s energy policy (Montmasson-Clair 2017; SAWEA 2017). Many would argue that Eskom is being disingenuous when it argues that renewable energy will be more expensive than the proposed 9.6 GW new nuclear build program, with a projected cost of $50 billion (about R776 billion). Irrespective of how the financing is structured, an amount of this magnitude raises the specter of crippling principal debt and interest payments that can lead to the reallocation of public budgets away from critical state spending (Scholtz and Fakir 2017). A number of important steps are needed to harness renewable energy in South Africa. Thus far, many African leaders have seen the opportunity that renewables present for their nations and have announced national energy plans and targets that reflect this vision. The major role that government can play in promoting renewable energy in the electricity sector is to set a target. The key idea is a requirement that a small but growing percentage of South Africa’s electricity supply should come from renewable resources. The South African government is already talking about such a target, and the draft White Paper on Renewable Energy

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suggests that an additional 10 000 GWh of renewable energy contribution should be achieved over ten years (United Nations [UN] 2020b). As power sectors and institutional frameworks mature, regulatory policies such as auctions and net metering are likely to be introduced. Policies are needed to entice private capital, which includes public–private partnerships, to share costs and risks, and to build capacity in local financial sectors to increase access to loans and other forms of financing (UN 2020a). Regional cooperation is a mechanism that needs improvement: It is crucial to bring about efficiencies and economies of scale by deploying renewable energy technologies in a coordinated manner. Therefore, regional Southern African Development Community (SADC) cooperation and integration in the area of RE can build capacity to build regional value chains, using a business ecosystems approach under conditions of economic crisis, pandemics (Ebola, COVID-19), democratic reversals, natural disasters, and corruption and political conflict. A business ecosystem approach is particularly effective in the large-scale deployment of shared renewable resources for power generation. Adopting an integrated approach to trans-boundary issues such as trade, regulatory frameworks and policies, regional infrastructure, and other cross-border issues allows countries to benefit from accessing regional renewable resources at affordable prices (IEA 2020d). Creating an overall enabling environment for renewables in Africa requires finding the right mix of policies and incentives, along with multi-stakeholder collaboration at the country and regional levels. A number of things need improvement: Firstly, the current infrastructure requires maintenance and new infrastructure needs to be rolled out. The infrastructure has fallen behind what is required for the South African population, creating an opportunity to leapfrog and immediately introduce smart technologies in new infrastructure rollout. Secondly, the right kinds of incentives should be introduced to ensure that the economy can develop more effectively, with less corruption and less preferential treatment. Thirdly, policy support is necessary in implementation to provide explicit compensation, and a clear regulatory framework is required for the curtailment of undelivered power. This can be seen in the most recent rounds of the renewable energy independent power producers (IPP) program in South Africa, which was launched a few years ago and has proven to be quite successful (Muzondo et al. 2021).

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South Africa can foster the transfer of successful business models to its own businesses, such as the small-scale off-grid renewable energy systems in Malawi, and support the private sector in adapting to the local context. The success of off-grid energy solutions, however, will depend largely on the extent to which they meet the energy needs of the underserved rural population, as well as their ability to pay (Danish Energy Management and Esbensen 2017). In particular, small-scale and community-based renewable energy projects are recognized as important forms of development assistance for reaching the energy poor. However, to date there are only a few empirical evaluations that analyze and compare the effects of these projects on local living conditions and their sustainability ex-post implementation. Regional networks, partnerships, and South–South cooperation should be intensified, because projects run by organizations with extensive established network connections and good links to the region and beneficiaries have higher success rates. Sustainable energy projects have positive effects on sustainable development (IEA 2020b). However, energy projects, even if only on a small scale, require continuous involvement and support (as opposed to one-off support) (Terrapon-Pfaffn et al. 2014). Renewable energy technologies, such as solar water heaters (SWH) and electricity generated from wind farms, concentrated solar power (CSP), and large-scale (more than 1 MW) solar photovoltaic (PV) systems, can be promoted further. These four technologies can make an extensive contribution to the renewable energy supply of South Africa, in addition to off-grid renewable energy systems (Edkins et al. 2010). Renewable energy solutions are seen as contributors to creating a Smart City. South Africa has only recently started with Smart City initiatives. Current thinking has been to replicate international Smart City experiences in South Africa. However, it is questioned whether this is an optimal strategy, as differences in context might affect the delivery of services (Coetzee et al. 2015). Furthermore, although the implementation of renewable energy policies requires large initial capital investments, they are crucial to ensure both universal modern energy access and emissions reductions (IRENA 2020). Besides, low-carbon growth strategies offer important direct and indirect benefits. Sound energy-efficiency policies across all sectors will lead to significant net savings (Indo-German Centre for Sustainability [IGCS] 2014). Also, renewable energy promotion will provide economic, social, and environmental co-benefits. These include reduced health impacts

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from greenhouse gas emissions and improved livelihoods from services associated with renewable energy industries, as well as decreases in the imports of fossil fuels. Small-scale manufacturing associated with renewable energy industries will also benefit from renewables development (Ouedraogo 2017). In a related sense, setting targets connected to renewable energy can help put South Africa on the map by signaling that there is opportunity and potential for investments in similar projects. A target can be an important way to help draw attention to tap into foreign direct investment and potentially attract finance to some of those investments. Targets also provide a clear signal that there is political commitment, that there is a strategy in place and that renewables are going to be part of the national development agenda. Depending on how credible that commitment is, it can actually play an important role, particularly for lenders who are looking at the long-term viability of different infrastructure investments in a given market (Muzondo et al. 2021). Energy master plans and regional initiatives that provide or include some form of renewable energy targets are useful. For example, in the Economic Community of West African States (ECOWAS) region, there has been success in creating regional templates for renewable energy targets across the region. The Sustainable Energy (SE) for all initiatives enabled countries from across Africa to adopt concrete agendas and to start implementing the kinds of policies and regulations necessary to scale up SE (Muzondo et al. 2021). South Africa’s renewable energy policy to date has largely been driven by a 10 000 Gigawatt hours (GWh) target by 2013, and renewable energy project subsidies offered through the Renewable Energy Finance and Subsidy Office (REFSO). Nonetheless, under existing renewable energy policy, few renewable energy projects for electricity generation have been deployed. Solar water heaters (SWHs) saw some market growth through 2009, largely facilitated by an SWH subsidy and increased energy awareness due to nationwide electricity blackouts (Edkins et al. 2010).

Strategies and Policies for Renewable Energy Deployment in South Africa In this section, we suggest strategies and policies for enhancing renewable energy in South Africa. Most of the suggested action plans and strategies are practical, considering South Africa’s capacity constraints. However,

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it is necessary that the strategies are well coordinated and supported by the State through clear policy and legal frameworks. Institutional arrangements should be put in place to support dialogue, provide oversight, coordinate implementation, and enable collaborative work. Policies should be clear, aligned with each other, and linked to timelines. Additionally, there should be legal tools to make such policies enforceable (Halsey and Overy 2019). South Africa already supports grid-connected renewables via feed-in tariffs, auctions, net metering, and investment incentives. The South African auction program has been especially successful in deploying renewables. While most renewable energy deployment was grid-connected in the past two decades, policies for decentralized approaches for rural electrification based on renewable energy need to be adopted. Regional power pools and renewable energy transmission corridors are important building blocks for the future expansion of renewable energy (Quitzow et al. 2016a, b; Kumar and Majid 2020). South Africa is already experiencing an energy transition. However, the big challenge is to ensure that this transition will indeed be fair and just. This will require a paradigm shift among all critical players to ensure that a transition indeed addresses many of the socioeconomic challenges in the country. In this regard, there are a number of challenges that need addressing to ensure that the energy transition is fair and just. First, in the area of governance and decision-making, much work needs to be done to ensure that the governance structures and approaches are truly inclusive and transparent. Participatory democratic decision-making is a fundamental factor underpinning any transition (Quitzow et al. 2016a, b). All social partners, and especially affected communities, should be at the table when plans and decisions are made. Second, in the areas of policy and the regulatory environment, a massive review of existing policies and regulations governing the energy system in the country is required to ensure that the benefits of renewable energy are maximized in a transition (IRENA 2020). In addition, social policies would also need to be reviewed, especially to ensure the social protection of the most vulnerable. Third, regarding capacity building, training and skills development, a scaled-up and targeted program for building knowledge and skills within communities and the country as a whole is needed to unlock all the potential benefits in a transition. Fourth, regarding financing and investment, both public and private investment in renewable energy and its value chains should be scaled up (IRENA 2020). In addition, new financing

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models should be explored to ensure the funding and revenue-generation opportunities for decentralized socially owned energy systems. To date, there has been no nationally driven process for planning a “just transition.” There are many initiatives and discussions on the issue, especially among non-state actors. However, there is a need for an inclusive process that involves all social partners in developing an overarching socioeconomic transition plan for the country, which can help to inform and guide any sector or localized transition planning for South Africa’s future (WWF 2017). The transition plan needs to consider the current economic crisis and the desperate need to secure a feasible post-COVID-19 economic recovery through turning to RE (Kuzemko et al. 2020). Adopting a broad multi-scalar and multi-actor approach to the analysis of energy system change post-COVID-19 is necessary. Four key themes shape the politics of sustainable energy transitions: a) the short-, medium- and long-term temporalities of energy system change b) practices of investment in clean-tech and divestment from fossil fuels c) structures and scales of energy governance d) social practices relating to mobility, work, and public service. While the effects of the pandemic continue to unfold, some of its sectoral and geographically differentiated effects are already emerging. The politics of sustainable energy transitions is now at a critical juncture, in which the form and direction of state support for post-pandemic economic recovery taking advantage of renewable energy adoption will be key (Kuzemko et al. 2020). This means that South Africa should maximize the percentage of renewable energy in the country’s electricity mix to bring about an energy future that is both least cost and most influential from a climate-mitigation perspective. The development of off-grid value chains should represent a particular priority (Quitzow et al. 2016a, b). In addition, there should be maximization and complementarity of the country’s solar and wind resources, and an avoidance of investment in climate-unfriendly fossil fuels and expensive nuclear energy to provide base load. It is imperative to enable cities and municipalities to plan their own electricity-provision systems, allowing them the opportunity to both procure and build their own renewable energy plants, which is essential to ensure future sustainability. Policies

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on both the national and sub-national level should support private sector investment in renewable energy technologies through incentives, loans, etc. Pressure would need to be exerted on Eskom to ensure that the utility complies with its contractual obligation to sign the outstanding off-take agreements. Furthermore, any transition from fossil fuels to renewables should take place within the context of a “just transition” that thoughtfully handles pressing socioeconomic challenges, namely poverty and inequality (WWF 2017; Fattouh et al. 2019). There is a need to strengthen the Renewable Energy Feed-In Tariff (REFIT), which was established in South Africa on the grounds that it has proved to be the most effective policy instrument to deploy renewables, as experienced in the German and Spanish examples of using of a feedin policy. The benefits of a feed-in tariff include that the premium risk for investors can be minimized by establishing long-term assurance for their electricity sales at a set tariff. This allows for improved access to finance by developers, as well as market assurance, which is thought to drive renewable energy technology development and learning, resulting in lower costs of electricity generation from renewable sources in the long run. Furthermore, the deployment of a number of different technologies can be encouraged with a REFIT, resulting in a more diversified electricity supply (Edkins et al. 2010). Zhang, Feng, and Chen (2011) add that, in the power-generation sector, the best policies to reduce greenhouse gas emissions include the modification of existing oil and coal plants so they will run on natural gas, and the promotion of local renewable energy sources. This strategy allows for fuel diversification in power generation, which will increase energy security and reduces green gas emissions (Ouedraogo 2013). Diversifying energy supply away from coal would have many benefits, including a reduction in the number of premature deaths from pollution, but the social implications of changes would need careful management (UN 2020b). In addition, investment-promotion measures are needed to attract both domestic and foreign investors, as well as encourage public– private partnerships to share investment costs, risks, and benefits (IRENA 2020). In parallel, there is a need to raise awareness among local financial institutions about the grid-connected and off-grid renewable energy market. Regional cooperation should facilitate large-scale renewable energy deployment. By working together, African countries have the opportunity to become energy champions and innovators. However, the

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actual cooperation mechanisms, such as the African Renewable Energy Initiative (AREI), for example, should be used in a constructive and effective way, with commitments, governance rules, and participation from the entire energy sector on the continent (such as civil society, private sector, and academia, among others). Even with the large-scale implementation of renewables, off-grid renewable energy solutions are also highly important to improve access to modern energy services and contribute to poverty reduction. This would require dedicated policy and regulatory frameworks in order to boost potential investments (Pouget 2019). The following section examines the policy options for RE in South Africa and makes some recommendations for action.

Policy Proposals for Renewable Energy in South Africa In this section, we explore the options for government to promote renewable electricity on a larger scale. Fixing Energy Prices and Targets The major role that government can play in promoting renewable energy in the electricity sector is to set a target. However, to facilitate a “just transition,” the cost of transition should not be borne by vulnerable groups. In addition, Halsey and Overy (2019) suggest that there is a need to shield low-income households from electricity or energy prices via a social policy that includes differential pricing or subsidies. Such a target is a key mechanism for leveling the playing field for renewables in a context where their environmental and social benefits are not given a value by the market. In line with this, the draft White Paper on Renewable Energy suggested that an additional 10 000 GWh of renewable energy contribution should be achieved over ten years, i.e., 1 000 GWh/y, to be produced mainly from biomass, wind, solar, and small-scale hydro (Winkler 2005). Renewable energy targets should be revised periodically. They have to be specific, measurable, achievable, realistic, and time bound. There are two possible points of intervention for government policy: regulating the quantity of renewable electricity (e.g., by setting targets for renewable electricity) and fixing prices through regulating tariffs (UN 2020a). Fixing targets for renewable capacity cannot be done in isolation. There are several factors that need to work in sync when one is aiming for such

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a quantum jump in capacity. The first is whether we have enough standby capacity in the form of hydro or gas that can be put to use immediately should there be a drop in generation from renewable sources due to a sudden fall in wind velocity or unexpected cloud cover. There is also the question of availability of adequate transmission links to evacuate that power. For renewable generation, the transmission links have to be more dispersed and go well into the interior. The difference in gestation lag of renewable generation projects vis-à-vis transmission lines is a factor that has to be borne in mind. In fact, this is one of the major reasons why investments in renewable capacity have gone down (Dasgupta 2020).

Policy Scenarios The three scenarios discussed below demonstrate what could be done to achieve renewable energy for all. Option 1: Electricity Feed-In Tariffs (FIT) An electricity feed-in tariff (FIT) uses price as the policy instrument. Government sets a price for renewable electricity, usually differentiating tariffs between different technologies. Tariffs are set by an electricity feed-in law and are guaranteed for a specific period of time (Menanteau et al. 2003). The electricity feed-in law also requires distributors to buy all renewable electricity in their area. Germany’s electricity feedin law, for example, requires distributors to buy all electricity from renewable independent power producers (IPPs), but does not specify a percentage of renewable electricity to be achieved. Nonetheless, experience in Europe has been that this policy instrument has resulted in the greatest increases in capacity (Meyer 2003). The promise of good returns on investment due to relatively high, guaranteed prices is a major factor. In economic terms, the policy favors producer surplus. Proponents argue that a grid-feeder law in South Africa would require less bureaucracy than a government-set target and allow more flexibility for small producers. It would provide greater security for developers of renewable electricity plants by guaranteeing a market and a price (Contejean and Verin 2017). The FIT is likely to promote investment, given the security of guaranteed prices that power producers would enjoy. The renewable energy industry tends to favor this option. While FITs have resulted in large quantities of renewable electricity in Europe, it is not self-evident that this

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would be true in South Africa. However, for developing countries with severe budget constraints, the key limitation will be government’s ability to pay for relatively high tariffs. FITs guarantee prices for developers, but would not provide certainty for the amount of renewable electricity that such a tariff would deliver under South African conditions. Given that the marginal costs of local renewable electricity production are not well known, the quantity produced by the change in price is not certain (Winkler 2005; Overland 2021). Option 2: Renewable Electricity Portfolio Standards The policy instrument that most directly sets the quantity of renewable electricity is a portfolio standard. In this policy option, government sets a target through a renewable electricity portfolio standard (REPS), while electricity distributors have flexibility in how to meet the requirement. International experience with REPS is greatest in some US states (Rader and Hempling 2001), where laws setting targets for the renewable share of generation capacity have been passed in Arizona, Connecticut, Maine, Massachusetts, Nevada, New Mexico, New Jersey, Pennsylvania, Texas (2 000 MW under Governor Bush), and Wisconsin (Wiser et al. 2002). An REPS entails the following: ● A purchase requirement: Government sets targets for the share of electricity distributed as a percentage of sales for each distributor. ● Resource eligibility: Eligible renewable electricity technologies would include solar thermal, wind, small hydro (10 MW), solar PV, landfill gas for power generation, biomass, wave, and tidal. ● Trading of credits: Economic instruments can be used to allow distributors to achieve the target at least cost, increasing the flexibility of the policy. As the industry is restructured into several regional distributors, individual distributors can be required to either achieve this percentage individually or buy credits from others who achieve more than their target. An REPS would be particularly important once the restructuring process in the electricity industry extends to wholesale competition to create an incentive for individual private generators to invest in renewables in a competitive market.

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Portfolio standards are generally envisioned as market-based policies in the sense that they use financial incentives rather than prohibitions to achieve policy goals. Several key concepts in portfolio standards are common to other market-based policies. Credits are an accounting mechanism used for compliance and are tracked in electronic databases, sometimes called registries. Lawmakers can choose the degree of flexibility regarding credit use in a portfolio standard, with potential effects on overall policy costs and benefits. Procedures to monitor, report, and verify credits can help portfolio standards achieve their policy goals and reduce the risk of fraud. A national portfolio standard might also have environmental effects compared to a business-as-usual scenario, depending on design choices such as source eligibility and the change from business as usual. Potential eligible sources vary in their greenhouse gas and air pollutant emissions, as well as other attributes such as water consumption and power density (which can affect land requirements). Implementation could affect environmental outcomes too. For example, deploying small-scale distributed eligible sources might have different effects than deploying large-scale eligible sources. Another policy consideration is potential interaction with state energy policies such as existing portfolio standards, electricity infrastructure siting, and the use of competitive markets to influence electricity investment decisions (IRENA 2020). Such interactions may generate debate regarding pre-emption and highlight potential regional concerns. The overall effect of a national portfolio standard on the South African economy would be influenced by multiple factors. However, increased electricity costs could reduce economic activity, depending on the price response throughout the economy. Potential price responses are reduced electricity consumption, increased investment in efficiency measures, or reduced spending on other goods or services. Some price responses might have a minimal effect on overall economic activity, for example, if consumers shifted spending from electricity consumption to energy-efficiency improvements (Lawson 2020). Strengthening efficiency throughout the economy would reduce the demand for both materials and energy, while the implementation of minimum energy performance standards for electric motors in the industry and mining sectors would be an important first step toward unlocking further efficiency gains.

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Option 3: Renewables Obligation Another way of fixing the quantity of electricity generated is a renewables obligation. The obligation “sets aside” a quantity of electricity generation, which is put to tender. Competition focuses on the price per kWh, so that a price is determined through bidding. The renewables obligation (RO) is a mechanism designed to support large-scale renewable electricity generation. Through the RO, the government places an obligation on all licensed electricity suppliers to source a proportion of the electricity they supply to customers from renewable energy sources. The renewables obligation is met by purchasing renewables obligation certificates (ROCs), either from renewable generators or from the ROCs market (Menanteau et al. 2003). This differs, however, from the FIT, where government sets the price upfront. The price is guaranteed for the contract period once the tender process is completed. The additional costs are finally borne by green customers or taxpayers. For instance, the UK introduced a non-fossil fuel obligation (NFFO) program in 1990 to promote renewable energy technologies and to pay the costs of nuclear stranded assets. In 2000, this was reframed as a renewables obligation (United Kingdom [UK] 2001). In this mechanism, the renewables capacity would be secured through contracts with renewables generators at premium rates (Nedergaard 2002). In this policy option, the regional utilities are obliged to purchase power from NFFO-awarded generators at a premium price. The difference between the premium price and the average monthly power pool purchasing price is subsidized through the Fossil Fuel Levy, as administered by the Non-Fossil Purchasing Agency. To help build a sustainable energy future, there is a need to invest in and support power plants that can generate renewable energy in order to hit ambitious government climate reduction targets (UK 2001).

Comparing Policy Options Policymakers in South Africa will need to choose between the options and combine the elements most suitable for local conditions. Local issues that need to be taken into account in applying policy instruments from other countries include the goal of universal access to commercial energy services, constraints on government budgets, and the relatively low price of electricity. However, the South African context differs significantly from

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the contexts in which most policy options for renewable electricity have been developed, viz. those of industrialized countries. Relevant differences include the fact that, despite a major electrification drive, about a third of the population remains without access to electricity (National Electricity Regulator [NER] 2001). The three options outlined above each have both advantages and drawbacks. Some of the factors that might influence the choice of policy instrument are summarized in Table 10.1. Given the significant demands on the government budget for other social expenditure, approaches that do not require direct government expenditure have an advantage. This would suggest that a REPS (option 2) would be an appropriate choice, while the renewables obligation (option 3) represents something of a compromise in that it sets a quantity but allows competitive bidding to set the prices. The key constraint is probably institutional capacity; if the government can build the capacity to administer such a process, this may become an option. A critical challenge for such an approach would be to prevent collusion between suppliers to drive prices up. Neither setting quantities nor regulating prices, however, would be sufficient on their own. To implement a policy option, government needs to create enabling conditions for the development of renewable electricity (Robert et al. 2020). The three options outlined above each have advantages as well as drawbacks. Some of the factors that might influence the choice of policy Table 10.1 Comparison of policy options to promote renewable electricity

Ensures quantity of renewable energy and diversity of supply Promotes investment by guaranteeing prices Does not require government to pick a winner 4 Requires government investment Source Winkler (2005)

Option 1: Feed-in tariffs (REFIT)

Option 2: Renewable electricity portfolio (REPS)

Option 3: Renewables obligation

No

Yes

Yes

Yes

No

Yes

If price is differentiated by technology Yes

Depends on whether target is differentiated

Yes

No

Yes

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instrument are summarized in Table 10.1. The renewable energy policy roadmap 3, with an electricity supply from renewable sources, is identified as the most favored strategy for South Africa. Winkler (2005) observes that the strategy would create the most possible employment, well above a 100% change from the baseline of 2015, and would stabilize GHG emissions from the electricity sector. A mixture of wind (30%) and concentrated solar power (70%) would be the largest contributors to achieving this target by 2030, supported by the renewable energy feed-in tariff (REFIT). REFIT (option 1) will support the deployment until the technologies become cost-competitive. From completing sensitivity analyses on roadmap 3, it can be seen that photovoltaic can play a more important role if higher technology-learning rates are encouraged by an effective REFIT with sensible tariff degression. If government guarantees a price through an FIT, it will be asked by utilities companies to compensate them for any additional costs. If government simply sets targets, industry has to find the least-cost way of meeting these, but is likely to pass on increased costs to consumers. Given the current government budget constraints, the government will be hard pressed to agree to large expenditure on guaranteeing renewable electricity tariffs. Getting the prices right, as would be required for government to determine the FIT, would be difficult—since there are few renewables, there is virtually no information on their marginal cost curve locally (Winkler 2005). Furthermore, higher reductions in GHG emissions can be achieved at a lower cost compared to renewable energy sources by encouraging nuclear energy to supply the additional electricity demand from 2020. The price of electricity under projection is also below that of policy options 1, 2, and 3. Option 3 is the most economical strategy based on the assumption that the cost of nuclear energy will not increase in the future. This shows that renewable energy policies aimed at substantial renewable energy targets, in particular the REFIT, can encourage GHG savings and employment without requiring too much additional private and public investment over and above the baseline projection (Edkins et al. 2010). The following section examines the creation of regional value chains as an approach to develop renewable energy in South Africa and the broader African region.

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Creation of Regional Energy Value Chains as a Strategy for Renewable Energy Development As South Africa embarks on a transition to sustainable energy, and the role of IPPs is expanded to make up for the supply shortfall, localization must be prioritized through proactive policy informed by widespread stakeholder engagement. Similarly, Pasquali, Shane, and Nadvi (2020) observe that regional value chains (RVCs) are increasingly considered key features of twenty-first-century globalization. In this regard, the creation of regional energy value chains is useful in fostering development. Energy value chains can have significant job-creation and poverty-reduction benefits. For instance, the International Renewable Energy Agency (IRENA) estimated that, by 2017, 76 000 jobs were created across African countries in renewable energy value chains, from manufacturing to operation and maintenance. The energy value chain includes all activities necessary for the production, distribution, and consumption of electrical energy. There are five major segments: fuel procurement, electricity generation, transmission, distribution, and the end-market or service location (Power Futures SA 2019). In addition, regional value chains and cooperative partnerships can help Africa industrialize and avoid the many uncertainties of fierce global competition. These regional variants of global value chains can be viewed as production systems from input provision to commercialization, spread beyond national borders to exploit existing complementary activities within a region. These complementarities could include differentiated labor costs and productive capabilities, natural resources, or geopolitical features such as maritime access, and trade agreements with extra-regional partners (World Economic Forum 2021). Broadly speaking, South Africa can pursue two models of regional value chains; first, it can be outward looking and supply global markets or, second, it can be inward looking, with development intended for regional consumption markets. Import-substitution regional value chains consider products that are both produced and consumed within the same region, creating potential complementarities and merging production capabilities with consumption potential. This type of regional value chain has the advantage of being intraregional and, as such, does not face barriers to entry (Weigert and El Dahsha 2019). However, local capabilities need to be enhanced across the renewable energy value chain.

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Capacity building is a central priority in South Africa. IRENA pays particular attention to energy value chains. For example, in recognition of the essential role of the reliable data provided by IRENA, energy statisticians across Africa have been trained in the collection, processing, and dissemination of renewable energy data, as well as in the construction of national renewable energy balances. There is an urgent need for increased cooperation between energy sectors at all levels, from strategy and planning to policies, budgeting, procurement, and implementation. There is a particularly strong need for innovation in delivery and financing models, and dedicated financing schemes by banks and financing institutions. Innovation should also be encouraged and promoted in the design of suitable and efficient devices appropriate for rural areas. Implementing the right ecosystem for accelerating off-grid renewable energy deployment requires efforts to develop the necessary human capital by building capacity across the off-grid value chain and supporting local entrepreneurship (IRENA 2019). The regional value chains (RVCs) enable the end product (finished product) to be exported, either globally or regionally, by a country in the region. RVCs, therefore, offer opportunities to the countries in the region to climb up the value chains by using the region to boost their competitiveness and produce and export higher value-added products. Well-established RVCs in South Africa can also provide an opportunity to the countries in the region to link gainfully to global value chains and to increase their bargaining power with the lead firms. If these issues are not addressed systematically, then local businesses will struggle to integrate into the large international supply chains that provide goods and services for infrastructure manufacturing and assembly, installation, operation, and maintenance. In terms of local content policies, South Africa is among several developing countries that require local and international renewable energy investments to bring local businesses into their supply chains (IRENA 2020). The level of localization that is necessary in the renewable energy value chain is linked to the extent to which the different aspects of this value chain can be carried out, operated, owned, or financed by local employees, businesses, or financial institutions and investors. The independent power producers are mandated to drive localization in South Africa as part of local economic development requirements. If renewable energy value chains are not localized effectively in developing countries, then much of the business and economic value of these investments is lost to

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foreign economies. The manufacturing of components and construction of infrastructure generate significant economic value. However, there are challenges to localization—renewable energy value chains may promise potential jobs, but without appropriate skilling or reskilling of workers (in the case of workers in the coal industry), this potential is significantly limited. Therefore, there is a need for adequate, long-term planning and investment for appropriate education and training to meet the needs of the renewable energy sector. In addition, countries may get stuck at the bottom of the value chain, unable to move up it, and may continue exporting low-end and low value-added inputs, with lower gains in terms of domestic value addition and diversification (UNCTAD 2018). The academic literature shows that there is consensus among observers that, for businesses to effectively integrate poor people into value chains through access to finance, markets, and other resources, companies need a supportive ecosystem (Gradl and Jenkins 2011). For example, many small and medium enterprises (SMEs) in South Africa require financial and technical support to start and scale up their innovative solutions. Similarly, large multinationals require the local knowledge of non-governmental organizations (NGOs) or local small and medium enterprises to access low-income markets. It is noted that many of the challenges facing businesses in Africa also apply to inclusive businesses operating on the continent: unclear regulatory and policy environments, a lack of infrastructure, high levels of illiteracy, and a lack of knowledge and skills. Therefore, regulatory reform and government support are crucial for enabling lowincome people to participate in the formal economy and to be integrated into value chains, as many of them do not have legal documentation for their informal businesses. Similarly, improving market infrastructure for low-income producers makes it easier for them to access markets beyond the local level by ensuring price transparency and reducing transaction costs. Despite its improved quality and increased sophistication, significant gaps in the financial landscape continue to create barriers to inclusive business and value chain development. Research is essential for advancing insight into and know-how relating to inclusive businesses and value chain development, which are relatively new approaches to energy business and development (Nielsen et al. 2021). Further, an ecosystems approach should be considered for inclusive business and value chain development. Gradl and Jenkins (2011) define a business ecosystem as an economic community supported by a foundation of interacting organizations and individuals—the organisms of the

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business world. Gradl and Jenkins (2011) argue that inclusive businesses are functionally equivalent in that they are communities or networks of interconnected, independent players whose actions determine whether or not a company’s inclusive business model can succeed. These ecosystems play an important role in the development of inclusive value chains. This means that, through the active role of NGOs and other social-purpose organizations, socioeconomic issues are integrated into the design stage of business models (Drayton, & Budinich, 2010). An inclusive business ecosystem includes actors such as individuals (as consumers and suppliers); companies; governments, business associations, and other intermediaries; NGOs, private and public finance providers; academic and research institutions; and media and other trendsetters. These players can fulfill critical roles in tackling barriers to inclusive business models and value chain development (Drayton and Budinich 2010). Each actor within the ecosystem will utilize its capabilities and incentives to contribute to the success of the inclusive business. An ecosystem can involve actors with the following capabilities: companies that are engaged in research and development, and commercialized new products and services, companies that purchase from and sell to other companies, provide financing solutions, and invest in new operations and infrastructure, and companies that create standards and compete against other companies. Government actors adopt new policies and regulations, adjust tax, and improve public services such as health care, education, and the provision of energy. Business associations, cooperatives, unions, standards bodies, and other intermediaries provide their members with services such as information on or access to markets and represent their members’ interests. NGOs raise consumer awareness and build trust, set environmental and social standards, change social and cultural norms, inform government policy reform, and create training facilities. Public and private donors build the capacities for producers, provide catalytic financing to companies and entrepreneurs, and advise governments on how to improve market environments. Academic and other research institutions undertake basic research that ultimately benefits all players in a market, and analyze what works and what does not in the business and policy spheres. The media and other trendsetters raise awareness, influence social and cultural norms, provide information, and create momentum for change (IRENA 2020).

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Steps and Measures to Be Considered by South Africa for Green Coal Policies South Africa need to take some steps to consider its green coal policies. Coal, although marginal in the final energy mix, still retains its role in the mid-term. In the long term, it will be replaced by sources with lower CO2 emissions, such as natural gas and electricity, unless coal with carbon capture and storage (CCS) is implemented. This trend is expected in Belarus and Ukraine in Central Europe; driven by Poland in Eastern Europe (EEU); and led by Kazakhstan in Central Asia (CAS). Many communities in these countries depend heavily on the coal sector. However, any accelerated phase-out needs to be supported by policies that address socioeconomic concerns and facilitate a structural and “just transition.” Further, retrofitted coal and gas with CCS may slowly be introduced from 2030 and may increasingly gain traction through to 2050. While conventional coal is expected to be phased out slowly, some coal-fired power generation with CCS is expected to retain the role of coal in the power generation mix. Gas and coal with CCS have great potential in the region and, if accelerated, can serve as an immediate solution to limit CO2 emissions from the energy sector. In many regions, such as that served by the United Nations Economic Commission for Europe (UNECE), gas is progressively substituting retired coal, oil, and nuclear capacities in the market (UN 2020a). Gas can play a major role in addressing climate change. The most important contribution that gas can make will be in the form of “green” or “blue” gas that has been largely or totally decarbonized, rather than as natural gas used for power generation or as feedstock for petrochemical products. Such development requires significant advances in the technologies and costs of carbon capture and storage (CCS), as well as in the development or adaption of infrastructure to cope with new fuels, notably hydrogen. However, the biggest problem faced by the natural gas industry is that there is very little appetite among politicians to address the practical aspects of tackling the climate emergency, decarbonization, sustainable energy provision, and air quality. Likewise, there is an increasing need to educate the public about these issues (UN 2019).

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The Role of Gas in Renewable Energy Transition South Africa’s current gas production is limited, although the Karoo basin has potential for shale gas reserves, with initial estimates of 13 Trillions of standard cubic feet of gas. However, these reserves have not reached commercial extraction. Also, gas demand could be sizeable in South Africa and Mozambique. Mozambique’s focus on creating new gas-based industries is to drive increased demand. The country holds most of the region’s new industrial demand potential. Beyond the power sector, there will be a demand for gas in other sectors. Shell plans to build a 38 000 barrel per day gas-to-liquids (GTL) plant, and Norway’s Yara aims to construct a 1.3 million tonne per annum (mtpa) fertilizer plant. Both will be located near Mozambique’s Rovuma gas sources in Cabo Delgado. Potential demand from the transport sector, if fuel switching is to take place, would be concentrated mostly in South Africa because of the sheer size of its industrial economy and its relatively more advanced transport sector. Mozambique and South Africa could address their local imbalances by trading as an integrated system while exploiting the SADC. A case for trade that could exist between the two countries could become even more relevant in the context of the current developments in the global gas markets. Gas trading is more cost-effective and versatile than power trading, given the distances involved. However, there is a need for advancements in the regulatory environment to enable the development and use of natural gas. It, therefore, can be noted that the region has some potential for gas-to-power development and even regional gas trade. Not only could this unlock a further supply of (cleaner) energy, the development of natural gas resources can bring real benefits to the economies of four countries (Botswana, Mozambique, Namibia, and South Africa) (IEA 2020c). It can generate employment, increase GDP, and raise foreign direct investments. The value chain associated with extracting natural gas can create substantial, permanent employment opportunities (direct and indirect). In addition, using natural gas locally supports industrialization (e.g., creating fertilizer and petrochemical industries), which also has positive effects on employment and GDP (USAID 2021).

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Experiences in Transiting to Renewable Energy Some examples from the African region provide insights into what can be done to ensure the transition to renewable energy, as well as the costs, lessons learned, and impact. Morocco has rapidly become a renewable energy champion in Africa and the world: It set targets to increase the share of electricity-generating capacity from renewables to 42% by 2020 and 52% by 2030, as well as reducing energy consumption by 12% by 2020 and 15% by 2030 through enhanced energy efficiency. Morocco quickly implemented its immense solar and wind projects. It was able to produce 400 GWh from solar thermal technologies, 1 662 GWh from solar energy, and 3 000 GWh from wind in 2016. The most wellknown renewable energy project in Morocco is called Noor, and its three components make up the biggest concentrated solar power plant in the world. The power plants are distributed between Ouarzazate (south of the country) and Midelt (north-central). The Morocco solar power plant has been in operation since October 2018. The project was supported by investments from the World Bank, as well as from the European Union and the African Development Bank, and bilateral finance from countries such as Germany and France. The workers hired on the sites were mostly Moroccans, and the three plants are planned to produce 500 MW at the conclusion of the project. Therefore, Morocco’s energy transition is inspiring and can serve as a path to follow. However, the country is facing challenges in the implementation phase: Several energy projects are behind schedule, and a real participatory strategy and decentralized approach to the energy transition still needs to be established (Pouget 2019). Many African governments already have implemented green economy policies across key sectors. In Ghana, green public procurement has supported the development of emerging markets in areas of sustainably produced renewable energy and energy efficiency. Sound fiscal reforms are being implemented in Ghana and Mauritius to introduce environmental taxes, remove environmentally harmful subsidies and reallocate budget expenditure to green sectors. Further, capacity-building programs and institutions, such as the Kenya National Cleaner Production Centre and the Rwanda Resource Efficient and Cleaner Production Centre, have been created to develop skills and support access to new green job opportunities (UNEP 2015).

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Lessons learned from Morocco’s experience confirm the need for government leadership; for adequate planning based on precise analyses of the situation; and for clear the allocation of responsibilities at the national and local levels. Progress was realized through ambitious and well-designed public programs and driven by the extension of national grid networks. Regarding isolated or dispersed areas, access to electricity was provided by solar home systems based on a fee-for-service model. In Morocco, more than 90% of the population cooked with LPG in 2018 as a result of LPG use being subsidized by the government. Similarly, a comprehensive strategy for rural development, integrating health and education services enabled Tunisia to achieve progress in rural electrification (IEA 2020a, 2020b). In South Africa, improved cookstoves and LPG would help to eliminate the use of traditional biomass, reducing household premature deaths by 80% by 2030 (IEA 2019; Rai 2017). Renewables offer multiple benefits and opportunities in the African context. Firstly, they are domestically available. Net energy importers can reduce import bills by deploying renewables, whereas energy-exporting countries can increase revenues from fossil fuel exports and improve current account balances. Secondly, renewables are cost-competitive. Recent data on renewable energy projects in Africa reveal that the leveled cost of electricity (LCOE) of solar PV and wind is significantly below the LCOE of oil-based power plants and, in some cases, even below the LCOE of new coal-fired power plants. Integrating renewables in diesel-based microgrids offers important cost savings. In addition, renewables can be deployed much faster than fossil fuel-based power plants. Renewables can also trigger additional economic benefits, such as jobcreation and socioeconomic development, in particular in rural areas. Finally, renewables are core components for any low-carbon strategy and offer important environmental co-benefits, such as improved local air quality and water security. While most renewable energy deployment was grid connected in the past two decades, a number of countries have adopted policies for decentralized approaches to rural electrification based on renewable energy. Finally, the establishment of regional power pools and renewable energy transmission corridors is an important building block for the future expansion of renewable energy (Quitzow et al. 2016a, b).

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Conclusion This paper has discussed the necessity of turning to renewable energy in South Africa. Opportunities, strategies, and policy proposals in energy deployment were examined. Based on the literature reviewed in this study, it was shown how renewable energy and policy on it can result in higher employment and savings, often at very little additional investment. Different renewable policy options were analyzed, along with the effects they can have in South Africa. Given the different policy options available, it is recommended that South Africa should support the rollout of renewable energy technologies. Considering the substantial demand on the government budget for other social expenditure, approaches that do not require direct government expenditure have an advantage. This would suggest that an REPS (option 2) would be an appropriate choice. Feed-in tariffs guarantee prices for developers, but lack certainty on the amount of renewable electricity such laws would deliver under local conditions. Portfolio standards set a fixed quantity, which would guarantee diversity of supply. A renewables obligation combines the setting of a target with a tendering process but may be too complex to administer. This paper recommends that, ideally, a renewable energy feed-in tariff (REFIT) should be coupled with a renewable electricity target that is well above that of the present 10 000 GWh target (Edkins et al. 2010). Thus far, renewable energy policy in South Africa has been ineffective. Renewable energy currently contributes relatively little to primary energy and even less to the consumption of commercial energy. Investment in renewable energy is important to reduce the negative economic, social, and environmental impacts of energy production and consumption in South Africa. There is a need to invest in renewable energy production and to its full utilization by the population (Winkler 2005). However, neither setting targets nor regulating prices alone can be a sufficient independent policy option. Power purchase agreements, access to the grid, and creating markets for green electricity are some supporting activities that should be considered. Funding is necessary because renewable electricity technologies have to compete with relatively low electricity tariffs. Therefore, different possible sources, both locally and internationally, can be explored. The extent to which mechanisms can be utilized determines the future mix of renewable energy in South Africa. This study has presented the relevance of the country transitioning to renewable energy.

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Regional energy value chains help to bring poor communities on board. In addition, including poor communities in value chains could unleash an enormous reservoir of human potential and result in more sustainable economic growth in South Africa. However, inclusive businesses and value chain development also face numerous challenges, among which are scaling up the viability of products and services, securing financing, and gaining the trust of low-income consumers. To overcome these challenges and maximize South Africa’s opportunities, inclusive businesses can rely on certain enablers that tend to be created and provided by actors from other sectors: government and the public sector, civil society, and academia. These actors can assist inclusive businesses in various activities, including communicating about and marketing products for income; providing resources to low-income entrepreneurs to enable them to become integrated into higher value chains; and capacity building. This means that inclusive businesses can reach their full potential by integrating the poor as consumers, suppliers, and intermediaries, and by building on the capabilities of actors within their ecosystem, such as the public sector and civil society (Gradl & Jenkins, 2008). The future of renewable energy in South Africa will involve technology development, environmental impact reduction, and market infrastructure improvement, among others. Specific recommendations have been limited to those judged to be most likely to accelerate the pace of deployment, increase cost-competitiveness, and shape the future market for renewable energy. The recommendations presented here are also pragmatic and achievable. Further studies should make additional assessments of renewable energy policy in South Africa to incorporate a more detailed analysis of possible energy-efficient policy and targets, as these will have a notable influence on the electricity demand in the country.

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CHAPTER 11

The Digital Divide in South Africa: Insights from the COVID-19 Experience and Beyond Benno Ndulu, Nomfundo Xenia Ngwenya, and Matlala Setlhalogile

Introduction The advent of the COVID-19 pandemic has firmly placed digitalization on the development agenda. Although the pandemic has caused economic and social devastation, it presents developing countries—particularly in Africa—with an opportunity to fast-track their plans toward a digital transition. Digitalization is defined by the UNDP (2019) as the

B. Ndulu · M. Setlhalogile (B) Wits School of Governance, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] N. X. Ngwenya Wits School of Governance, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_11

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utilization of digital technologies to reconfigure organizations’ business models, including the use of digital technologies, to improve the delivery of services and their quality. Despite this opportunity, many developing countries have not been able to transition to digital platforms due to lack of infrastructure, networks, technologies, and related skills. The global infrastructure gap was estimated to amount to $15 trillion in 2018—with developing countries accounting for the greater portion. The reality is that fiscal positions have deteriorated, but infrastructure needs have not (Abadie 2020). Like many other developing countries, South Africa has been forced to accelerate its plans to embrace digitalization. For an inclusive society to be realized, universal service and access to Information and Communication Technologies (ICT) is a necessity. Notwithstanding that several legislative instruments and policies in South Africa—such as the Telecommunications Act of 1996 and the Electronic Communications Act of 2005—have been geared toward the promotion of universal and affordable provision of telecommunication services and connectivity for all, access should be seen as an entry-level condition for digital inclusion—and not the endgoal. Usage, or uptake, along with the complementary impact should be the ultimate goal. Given this context, the purpose of this paper is to make recommendations on how to narrow the digital divide by decreasing barriers to digital uptake in South Africa. Specifically, the focus will be on going beyond access to increasing use of digital technologies. This will be done through a twofold approach. First is to measure and characterize the South African digital divide across three categories—income levels, urban/rural divide, and age divide. Since digital services are a means to earning livelihood, deprivation of this means may widen and perpetuate the existing high inequality in the country. Second is to identify the key drivers behind the divide, which is more pronounced in terms of use rather than access to digital services. The paper is divided into six sections. Section 11.1 is the above background stating the paper’s purpose and approach. Section 11.2 discusses the impact of COVID-19 and the need for accelerated digitalization in South Africa. Section 11.3 assesses recent progress in digitalization of the South African economy. Section 11.4 characterizes South Africa’s internet users’ profile and the digital divide in the country along the abovementioned three categories (income level, urban/rural divide, and age divide). Section 11.5 discusses the key drivers of inclusive uptake of digital services in South Africa. Section 11.6

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concludes with a summary of the existing policy gaps and recommends policy interventions for achieving inclusive digitalization.

COVID-19 and Lessons on the Need for Digitalization in South Africa South Africa still has a long way to go in terms of digital readiness, especially regarding the level of technological availability and adoption. Challenges such as affordability, digital literacy, and upskilling of internet users for productive use must still be addressed to realize the desired developmental impact of digital technologies. These challenges were further exposed by the insufficient digital readiness of the South African business and education sectors at the start of the pandemic.

Business and Digitalization Digitalization readiness, or rather lack thereof, in South Africa was apparent in a study conducted by World Wide Worx (2021) titled Remote Working in South Africa 2020. The study’s findings indicated that less than 37% of companies in South Africa were regarded as well-prepared, meaning that they had already fully rolled out their digital transformation strategies prior to the introduction of COVID-19 lockdown in March 2020. This is despite 95% of the organizations surveyed indicating that digital transformation was important for them. Digital transformation strategies in this context are understood to be the digital enablement of all processes within an organization. Additionally, even though the proportion of enterprises that had already implemented their digital transformation strategies constituted more than a third of surveyed firms, these firms were largely based in urban areas. It is well-documented that fixed line and fiber networks are most prevalent in high-income metropolitan areas, and urban areas are 15 times more likely to have fixed line coverage than rural areas (Genesis Analytics 2020a, b). As such, the study’s findings should be interpreted with that context in mind. In a 2018 study which surveyed 1,155 executives at global manufacturing companies in 26 countries including South Africa, Price Waterhouse Coopers (PwC) noted that none of the maturing companies surveyed in South Africa could be considered Digital Champions, i.e., companies that view digitalization in ways that are far-reaching, well beyond automation and networking, and are aggressively innovative

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(PwC, 2018). Most of the companies fell into the Digital Novice category—i.e., the least digitally mature companies in the study report. Beyond global manufacturing firms, the digitalization transition has been slow in the Small, Micro and Medium Enterprises (SMMEs). In a study conducted by SME South Africa which surveyed 1,157 South African SME owners in 2018 (SME South Africa 2018), the majority of respondents (86%) indicated that a smartphone was the kind of technology they use in their businesses all the time while only 20% used e-commerce on a regular basis, and just 22% made regular use of cloud services. The PwC and SME South Africa studies illustrate that prior to COVID-19, South African enterprises were not embracing digital technologies at a level that was required to significantly bolster their competitiveness. For businesses in low income and rural areas, the inaccessibility of fixed line connections means they must rely on less stable mobile networks, which also comes with the challenge of costly data bundles. While there was a substantial 25% growth in online retail sales figures from 2017 to 2018, the sector was still not well-established, as it was estimated to only constitute 1.4% of total retail business in the country that year (World Wide Worx 2021). This segment represented R14.1 billion of the entire retail business in South Africa, which was estimated at R1,07-trillion in 2018. The COVID-19 pandemic forced many South African companies to accelerate their digital transformation and improve their online service readiness. Initially, government restrictions on e-commerce had hamstrung online buying. Government designated a number of goods as non-essential and barred online trade in those goods. These regulations were later relaxed as the country moved away from a hard lockdown and e-commerce resumed at full scale. The pandemic saw online retail more than double in two years. The total growth of online retail in South Africa grew by 66% between 2018 and 2020 (World Wide Worx 2021) and was largely driven by demand for retail home deliveries. While this is an encouraging development, the online retail market will still face some challenges posed by the country’s lasting inequalities and entrenched spatial divide. Delivery methods available to township and rural residents remain few and limited (Small Business Institute 2021).

The Education Sector and Digitalization Beyond remote working and e-commerce, educational activities in many institutions across the country switched to remote (online) learning

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because of the pandemic. This was a difficult task as only 37% of South Africans were remote-learning ready based on a study conducted by Krönke (2020). The study’s remote-learning readiness was determined by at least a moderate level of digital literacy and having either a smartphone or a computer in the household. The study found that 36% of households in South Africa had both a smartphone and a computer, while another 36% only had either one of these devices in their households. The study also indicated that 24% of households had a phone with no internet access and the remaining 4% had neither a phone nor a computer in their households. This translates to a significant number of South African households—almost 30%—having no internet access. When compared to other African countries, a demand-side survey of digital access and use in 7 African countries inter alia found that only 11% of the population in South Africa used internet for education compared to 49% in Ghana, 33% in Nigeria, 27% in Mozambique, and 16% in Kenya (Makwakwa 2020). This is notwithstanding the fact that South Africa had the highest phone and internet penetration rates among these countries. The impact of the pandemic on learning disruption was not trivial. UNESCO estimates that over 91% of the world’s student population was affected by the national and/or local school closures due to the pandemic (Makwakwa 2020). In South Africa, 14.6 million learners were affected by school closures and most of those affected are from households with no internet access, therefore they could not continue with online education during this period of closure (Makwakwa 2020). The pandemic-induced school closures could have a devastating impact in Africa—the continent with the youngest population—especially when juxtaposed with existing low rates of internet access and overall lack of affordability for the majority of its citizens.

Digitalization in South Africa---Recent Progress The use of digital technology (i) supports economy-wide increases in productivity; (ii) reduces unit cost of service; (iii) reduces transaction costs in the distribution of goods and services; and (iv) helps to resolve market failures and in doing so engender greater competition and efficiencies in domestic and global markets (Pathways for Prosperity Commission 2018). Digital services are valued not only for their rapidly growing contribution to GDP but also for their ability to spur productivity growth

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and efficiency in other sectors (positive externality). The International Telecommunication Union (ITU) lists a range of studies that measure the macroeconomic effects of mobile broadband penetration (ITU, 2013). The effects vary for sets of countries and range from 0.8% to 1.5% of additional GDP growth per 10% increase in mobile broadband penetration (ITU, 2013). A factor of 1.1% additional GDP growth for 10% higher broadband penetration (using EU impact estimate), when applied to South Africa would lead to R 330 billion additional GDP and R 82.5 billion additional tax revenues over five years. McKinsey Global Institute (2016) calculates that widespread use of digital finance could boost annual GDP of all emerging economies by $3.7 trillion by 2025, a 6% increase (approximately a percentage point a year) versus a business-as-usual scenario. Nearly two-thirds of the increase would come from raised productivity of digitalized financial and non-financial businesses and government payments. One-third would be from the additional investment that broader financial inclusion of people and micro, small, and medium-sized businesses would bring. The small remainder would come from time savings by individuals enabling more hours of work. This additional GDP could lead to the creation of up to 95 million jobs across all sectors. In the developing world and especially Africa, mobile broadband is negatively correlated to the Gini index, suggesting that higher penetration of mobile broadband tends to coexist with a more equal distribution of income (World Bank 2019a, b, c). It is therefore not surprising that notwithstanding the level of technological advancement in South Africa, there is a very significant digital divide based on the high inequality of household income with a Gini coefficient of 0.63 in 2015 (World Bank 2018), second only to Lesotho in the world. Hjort and Tan (2019) find that fast Internet decreases employment inequality and that there is employment growth for both skilled and unskilled people. This means that mobile broadband can directly target inclusive economic growth, that is, economic growth that is distributed fairly across society and creates opportunities for all.

Internet Penetration in South Africa---Access and Use South Africa has an estimated population of 59,62 million (Statistics South Africa 2020) with two-thirds of it (67%) considered to be urban

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dwellers (World Bank 2019a). Based on the 2018 economic indicators, South Africa is classified as an upper middle-income country with a GNI per capita of $12 630 (World Bank 2019b). Despite this classification, 37.6% of its population lived below the poverty line of $3.20 a day in 2018 (World Bank 2018). The extent of inequalities is a key contributor to this persistent level of poverty. With a consumption expenditure Gini coefficient of 0.63 in 2015, South Africa was the most unequal country in the world (World Bank 2018). Indicators of the digital divide in South Africa include the level of internet coverage, the type of coverage in urban and rural areas, and the difference in the number of LTE devices per province. The key factors shaping these indicators are the legacy of apartheid spatial planning and policies that have been largely focused on access rather than use.

Spatial Inequalities and Internet Penetration Rate While the South Africa’s redistributive social policies have helped reduce material poverty, they have not had a positive impact on improving spatial inequalities, which has reinforced the uneven development of the country (Pieterse 2018). Poorer localities tend to have inferior public infrastructure and more mediocre services, whereas big cities have superior communications infrastructure, and broadband (Turok 2018). There is a difference in the type of network coverage received by rural and urban populations respectively. In every province, the network coverage for urban areas is superior to rural areas. Furthermore, rural areas are often faced with the challenge of poor network quality and coverage (Chair 2017). For example, the Northern Cape has the lowest rural 4G coverage at 72%, but its urban network coverage is significantly higher at 99%. Even in Gauteng province, where rural coverage is higher than other provinces (99%), urban coverage is universal. The National Infrastructure Plan adopted in 2012 had 18 Strategic Integrated Projects (SIPs) approved to support economic development and address service delivery challenges in the poorest provinces (PICI 2012). Strategic Integrated Project (SIP) 15 was adopted to specifically provide broadband coverage to all households by 2020 through prioritizing rural and under-serviced areas. The SIP 15 details how the government intended to expand access to communication technology to a far greater percentage of residents in the country. The objective of SIP

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15 was later enhanced through the enactment of the Infrastructure Development Act which came into force in 2014. The Act was intended to, among other things, ensure that infrastructure development such as ICT infrastructure is given priority.

Growth in Smartphone and LTE Devices In addition to the extensive wireless coverage, South Africa had a smartphone penetration rate of 91.2% in September 2019 compared to 81.7% in September 2018. The number of LTE devices is also rapidly growing across all nine provinces in the country. Fixed broadband and fiber-tohome internet connections have also been on the increase in the past five years, even though there was a significant decrease of 19.6% in fixed broadband subscriptions in September 2019 compared to September 2018. This is largely due to Telkom’s transition from ADSL to fiber and the decommissioning of copper connections where fiber is available. With this transition, fiber connections and fixed LTE connections are likely to overtake fixed broadband connections in a few years. Additionally, wireless-broadband subscriptions increased by 25% between 2018 and 2019, while mobile cellular data subscriptions increased by 18.8% in the same period.

Access vs Usage South Africa’s internet penetration rate is however not correlational with the vast wireless network coverage across the country and the almost 28 million LTE devices. The near universal wireless coverage in the country does not translate to usage and impact. Access is at times incorrectly considered the end-goal of digital inclusion strategies as it was the case in the Strategic Integrated Project (SIP) 15 of 2012. Access should be seen as an entry-level condition for digital inclusion (Genesis Analytics 2020a, b). Although figures presented in Krönke’s (2020) study differ from those cited in the Competition Commission’s (2020) Competition in the Digital Economy report, both sources illustrate that there is low usage compared to access. Krönke states that an estimated 52% of South Africans use phone and internet regularly, while 41% use either a phone or internet irregularly and 6% do not use phone or internet at all. The Competition Commission’s report indicates that only 65% of South

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African households have at least one member that has accessed or used internet at home, or work, or place of study, or internet cafes. South Africa’s mobile internet profile is very similar to Brazil, another emerging economy with an inequality profile very similar to South Africa’s. Internet accessibility to the poor is still a challenge there too, as only 7% of those at the bottom of the income pyramid can get web access through both a personal computer and mobile phones, compared to 98% in the higher-income brackets (Mari 2018).

Internet Users’ Profile in South Africa Despite the barriers associated with internet access, the demographics indicate that a substantial number of internet users in South Africa (22 million) are active social media users. This translates to about 63% of internet users and 37% of the country’s population being social media users. Social media users spent an estimated 190 min on social media a day. The age group 25–34 are the largest users of social media followed by the age group 18–24 (Kemp 2020). Another estimation from Talkwalker (2020) suggests that the two age groups account for 88.3% of social media users in the country. Furthermore, according to The Space Station (2016), about 66% of internet users in 2016 were black (albeit these users only constitute a little over 20% of the total black population), 23% white, 8% colored, and 3% Indian. The majority (57%) of internet users were from households that had an income of less than R12,000 a month (accessed internet via a mobile phone or tablet), 23% in the household income bracket between R12,000 and R24,999, while 10% were from household income bracket of between R25,000 and R49,999, and 10% from households with income more than R50,000. The larger share of blacks and lowincome earners among internet users is a mere reflection of the fact that blacks and low-income earners make up slightly more than three-quarters (75%) of the population but the penetration rates within these groups is much lower than in the others.

Key Drivers of Inclusive Uptake of Digital Services in South Africa According to GSMA, a mobile operators’ trade body, smartphone adoption in Africa is increasing but smartphones still account for less than half of total connections (GSMA 2021). There remains a gap between connectivity and use. Once connectivity is established (access), three key

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factors significantly influence an inclusive uptake/use of digital services— (i) affordability of digital services and mobile devices (smart or feature phone), in terms of income and price; (ii) consumer readiness which is largely determined by level of educational attainment and digital literacy, and (iii) accessibility of content in terms of complexity and language as well as being fit-for-purpose. Below, we discuss each of these main barriers and their influence on the digital divide in South Africa.

Affordability For the 50% of the world’s population estimated to lack internet access, the biggest barrier is cost. This becomes starker in Africa as nobody pays more for internet access than Africans (Alliance for Affordable Internet 2019). In 2019, only 10 out of 45 African countries (Algeria, Botswana, Cabo Verde, Egypt, Gabon, Mauritius, Namibia, Nigeria, Sudan, and Tunisia) met the affordability standard, defined as 1 GB of mobile prepaid data costing 2% or less of the average monthly income. The average cost of 1 GB of data on the continent is 7.12% of average income, and in South Africa, it is 2.5% of monthly income. In a survey of 1170 households to determine key reasons for limited internet use in South Africa, data cost was ranked as the number one obstacle (47.15% of respondents), followed by internet speed or connectivity quality (24.22% of respondents) (Research ICT Africa 2019). In 2020, South Africa’s Affordability Drivers Index (ADI) was ranked 26th among 72 countries, where being ranked number one represents the highest affordability (Alliance for Affordable Internet 2019). South Africa failed to meet the affordability threshold largely on account of low monthly average income for poor households and high cost of internet. South Africa is placed close to the median point of countries ranked in terms of cost of data packages in the region. Globally, South Africa was ranked the 148th least expensive place to get data in a survey of 228 countries. With an average price of R88 ($4.30) for 1 GB of data, South Africa is one of the countries with the most expensive mobile data in Africa (Cable 2020). The Competition Commission’s Data Services Market Inquiry also found that South Africa’s data pricing is more expensive than most SADC and BRICS countries (Competition Commission 2019). Although some network providers reduced data prices after the Competition Commission’s findings, the cost of data remains high (Chinembiri 2020). Similarly, affordability of devices also acts as a barrier, although

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there have been noteworthy improvements in cost reduction. The GSMA reported a price decline by 52% from US$245 to $117 between 2012 and 2017 (GSMA 2017). Suppliers such as Tecno have driven down costs through supply chain optimization and the cost of entry-level smartphones in South Africa is as low as R499 for an Aspire 5 (Mr Price 2020) and R774 for a Tecno 1 (MWP 2020). The overall trend, therefore, is that the cost of ownership is declining over time. Nonetheless, considering that the child support grant was R445 in 2020 and the social relief grant is R350, therefore should be continued efforts to make these devices accessible. Another barrier that needs to be overcome to improve usage is low digital literacy.

Digital Literacy Digital Literacy affects consumer readiness for uptake of digital services. It is evident from past research that a lack of skills is one of the most cited reasons for non-usage of the internet (Schmidt and Stork 2008) and differences in the endowment or acquisition of these skills often results in a digital divide. When acquired early in life, these skills create a digital culture that embraces a way of living, particularly among digital natives (those who have grown up in the digital age). Gauteng is South Africa’s economic hub and it has the highest rate of network coverage. Despite this, a survey of 1050 digital natives in that province found that males and youths from non-designated (whites) and higher-income households tend to access the internet more frequently and are digitally wiser than young females and those from designated (blacks, colored, and Indians) and lower-income households (Tustin et al 2012: p. 9147). These skills cover information search, playing games, downloading content, school assignments and uploading photos, posting videos, and downloading on social network sites.

Fit for Purpose Content While affordability of devices and services and digital literacy play significant roles in internet usage, inaccessible and useless content is also considered one of the barriers to internet use. For example, Brazil is the largest Portuguese speaking country—with only 5% of the population speaking English (Mundorh 2019)—yet an estimated 52% of internet accounts were in English in 2018 (OECD 2018). This means that there

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will be significantly less content accessible to individuals who do not speak English and therefore less incentive to use the Internet. Digital platforms have become the new conveyor platforms for delivery of a wide variety of services, a marketplace for virtual meeting of buyers and sellers of goods and services, classrooms without walls, and a meeting place for job seekers and employers. Localization of these platforms, mainly via a rapidly growing number of start-ups and small digital firms, is the most potent way of contextualizing services and aligning them to needs. Platforms should respond to local demands and provide content that is considered useful by users. For example, they can provide content that addresses the high unemployment rate, especially among low-skilled workers. There are currently 90 digital platforms in the country helping to unlock demand for low-skilled labor by facilitating exchange of tangible goods, services, and labor. These include (i) blue-collar task matching for domestic services, gardening, maintenance, e.g., SweepSouth, Kandua, and Clockwork; (ii) Transport and logistics such as e-hail, Load It, Droppa, Picup, and WumDrop. But content needs to be as relevant to rural settings as it is in urban settings. The example of the Alibaba Rural Support Programme in China shows how with the assistance of Alibaba’s Taobao platform, communities that rely on agricultural output for survival were drawn into digitizing not only through creating relevant content, but also through supporting the required infrastructure to enable them to access that content (Li 2020). The ability of the ICT sector to increase productivity across the entire economy and indeed support intensive use of Apps and digital platforms is dependent on the interaction of three digital platforms, namely connectivity, payment, and identification (World Bank 2019a, b, c). The integration of these three platforms, especially when leveraged by widely used mobile applications such as e-Government and e-commerce platforms could drive economic growth and employment at the margin, due to network effects that intensify information flow and interaction between connected individuals, businesses, and public service providers (World Bank 2019a, b, c). If only a small fraction of citizens use the Internet, then only a small fraction of society can access e-services such as e-health, e-education, e-government and private sector innovations that rely on connectivity are limited.

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Actions for Inclusive Digitalization In this section, we lay out recommendations for increased connectivity and onboarding onto the broadband platforms for active use by everyone. Three key areas of intervention are identified. One is business models that price services and products with the objective of addressing inequality in access and use. This will include Government action needed to support and complement progressive or affirmative action by business. The latter includes taxation of digital services and public access arrangements. The second area entails expanding use of innovations such as High Altitude Platform Stations (HAPS) and TV White Space (TVWS). The third area is design and availing content/product with inclusion in mind—accessible and useful content tailored to the excluded. It may involve developing “lite” products, automating processes, or building products at a different scale. We discuss these areas in detail hereunder.

Pricing and Tax Policies for Inclusive Digital Transformation In his 2020 State of the Nation Address, President Ramaphosa called for two sets of actions in a bid to reduce digital inequality in South Africa (Gillwald 2020). The first action was for mobile operators to adjust their pricing in a manner that removes the poverty premium in low denomination, prepaid bundles. The poverty premium arises because poor people, who predominantly use these low denomination bundles end up paying more proportionate to their incomes than wealthier groups. This happens in two respects. First, prepaid data costs more in South Africa than post-paid data, the latter being predominantly used by wealthier regular income earners. Second, higher value packages, usually purchased by wealthier users, typically enjoy larger discounts. Thus, poorer segments of the population have limited access and use as they are required to pay upfront at higher prices than their wealthier counterparts. The second intervention identified by President Ramaphosa is the establishment of “Lifeline” data packages to be provided daily at no cost to users, to promote onboarding of low-income users. This is similar to the arrangement in water supply where the first 6000 L are offered free of charge for the benefit of public health. Mobile network operators have responded to the call. For example, MTN offered a free lifeline of 250 MB daily data during the 21-day COVID-19 lockdown.

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It was offered on ayoba, an app that supports four of South Africa’s local languages, including isiXhosa, English, isiZulu, and Afrikaans. This offer has been retained post-lockdown, capped at 1 GB a month (Ayoba 2022). In a broader business pricing model, this is equivalent to a freemium pricing strategy, which allows users to utilize basic features of a software, game or service free, then charges for “upgrades” to the basic package. Under a freemium model, a business gives away a service at no cost to the consumer as a way to establish the foundation for future transactions or upgrades of the service provided at a price. In both cases, this turns out to be a defacto cross-subsidization of low-income use by those who can better afford these service—with overall public benefit to the whole society. Onboarding to broadband use often promotes low data denomination users to migrate to higher-priced data denomination as they learn about other types of uses which require higher bundles of data. Issues have been raised about potential sustainability challenges, which may arise from this approach to pricing. A freemium business model works where there are financial capabilities to support upgrades of use/bundle, where purchasing power is adequate, gestation to profitability short and funding sources available. Sustainability of the digital firms depends crucially on these conditions being met. In addition to facilitating data usage, South Africa needs to increase usage of smartphones. As the GSMA (2017) report finds, the most aggressive strategy to reduce smartphone costs is for third parties to subsidize or offset device costs (GSMA 2017). One strategy worth considering is using a Universal Service Fund subsidy to lower the cost of smartphones in rural areas that are newly connected to 3G or 4G networks. This would require opening universal service funding to alternative demandside subsidies and away from the traditional supply-side subsidies that have been used more often in the past in various jurisdictions.

Digital Taxation High sector-specific taxes pose a huge burden on internet access and use. Furthermore, increased costs from taxes/levies are likely to have a disproportionate impact on low-income users. They also propagate the misconception that internet access and social media use are luxuries. It is instructive to learn from the positive impact on uptake of internet that the 1998 Internet Freedom Act had in the early stages of digital transformation in the USA. The question of whether to apply taxes on Internet

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access was a particularly sensitive topic, which led to the passage of the Internet Tax Freedom Act in 1998 (GAO 2006). The Act restricted how states can tax Internet access. There is an obvious tension between generation of needs to finance development and the need to incentivize digital transformation of the economy. To the extent, this transformation has a larger impact on growing the tax base than immediate revenue forgone in reducing the tax burden on innovation, the economy can gain on net basis. Effective 1 June 2014, South Africa required non-resident vendors of digital services to customers (B2C and B2B) to register for and collect Value-Added Tax (VAT). The Electronic Service Regulations 2014 were revised in 2018 and the revisions came into effect on 1 April 2019. These regulations require foreign electronic service entities to register for VAT in South Africa, where the total value of electronic services supplied in the country exceeded R1 million within a 12-month period (SARS 2019). They also expanded the scope of digital services that would be subjected to VAT. Although we requested information on VAT tax data from SARS to determine the impact of the tax, the request was rejected by the Office of the Commissioner, categorizing it as sensitive taxpayer information. Taxation could be used to increase usage of data and smartphones. To complement progressive data pricing strategies discussed above, Government could adopt a progressive taxation regime that could, for example, zero rate the VAT on data packages of 1 GB or less to encourage onboarding of those excluded from use and increase broadband penetration with the positive externalities. Likewise, it could suspend VAT on low-end smartphones to enhance their affordability for low-income earners.

Innovative Interventions There have been several innovative initiatives aimed at facilitating access to internet in light of the prevailing barriers such as infrastructure, affordability, and digital literacy. In Kenya to bridge the gap between coverage and access, a number of innovations are experimenting on how to make existing network services more attractive to low-income users. For instance, poa! Internet piloted offering low-cost Wi-Fi services with curated, cached content to encourage low-income users in Kibera to adopt the internet. The internet provider completed Kenya’s largest public Wi-Fi network with the deployment of more than 3,000 hotspots

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across Nairobi and Kiambu counties and the launch of seamless home broadband and street Wi-Fi for its subscribers in 2019. The targeted subscribers are mostly those in rural communities around Nairobi (IT Business Direct 2019). Recently, another innovative initiative has been implemented in Kenya with a network of giant internet-enabled balloons, known as High Altitude Platform Stations (HAPS) from Google’s sister firm Loon. The objective of this project is to provide connectivity to people who live in remote regions that are underserved or totally unserved (BBC 2020). Facebook also conducted a HAPS experiment in Oudtshoorn, South Africa in 2019 (HAPSMobile 2019). While these are positive developments, none of the initiatives has proven to be economically viable at scale (USAID 2017). This is mostly created by the fact that most rural areas tend to have low population densities which increases cost-to-serve of network deployment. Challenges to servicing rural communities might be solved through collaborations with major anchor tenants, donor/corporate partners, and/or low bandwidth service models such as microtelco/community GSM. As highlighted by South Africa’s former Director-General in the Department of Communications, Andile Ngcaba, driving research that will accelerate the adoption of HAPS in Africa will require close collaboration between research institutions, the public and the private sector. South Africa’s strategic positioning to drive this collaboration effectively is derived from several world-class institutions and researchers that are known for driving technological innovation. Examples of these include the Centre for Scientific and Industrial Research (CSIR), the Houwteq and Overberg Test Range and alumni of the Institute of Software and Satellite Applications (Ngcaba 2020). Traditional mobile networks have been the primary model for connectivity and service delivery for most of the population. This is despite the recognition that these service providers are not necessarily suitable to deliver connectivity to remote and underserved locations. TV White Space (TVWS) has been touted as a probable solution to lack of broadband in rural and remote areas. TVWS is the inactive or unused space found between channels actively used in UHF and VHF spectrums. This technology was first used in 2013 in the Philippines when Microsoft partnered with the Department of Science and Technology Information and Communications Technology Office in the Philippines to power internet connectivity (Upgrade 2014).

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South Africa will be well-positioned to adopt this technology once it completes the migration from analogue to digital broadcasting signals that is currently under way. This would significantly improve provision of connectivity in remote and inaccessible places. Trials for improving lowcost broadband access have successfully taken place in various provinces. In 2018, the Independent Communications Authority of South Africa (ICASA) published the final regulations on the use of TVWS. Use of this technology is also creating room for smaller service providers to participate in cost-effective Internet provision that reduces data service congestion by mobile network operators. This was recognized during the pandemic when ICASA granted permission to several Small, Micro and Medium Enterprises (SMMEs) for deployment of TVWS networks in 2020 (Mzekandaba 2021). South Africa’s Development Finance Institutions (DFIs) should support the development of this sector through financing for SMMEs.

Spectrum That Can Enable New Business Models Spectrum has previously only been allocated to large companies, such as mobile operators. Spectrum auctions are often limited to big operators, and awarded for the whole of South Africa, limiting accessibility for new entrants or ISPs. The rationale for spectrum auctions is that they promote efficient outcomes. However, most recent spectrum auctions have not been truly competitive because the operators bid at the reserve price, i.e., the minimum amount possible. One way of increasing competition so that more national and regional operators may have a chance to compete and drive down prices is through the payment terms for spectrum. Although the ITA does not mention it, making provisions for installment payments for smaller bidders would reduce the upfront costs that would otherwise be passed down to consumers. While making spectrum available to smaller providers on favorable payment terms is desirable, the regulator should also ensure that those small providers utilize spectrum in a manner that increases price competition. While this is the case, the recent spectrum auction in early 2022 has once again been dominated by large companies. The Independent Communications Authority of South Africa (ICASA) concluded a spectrum auction among six qualified bidders, namely Cell C, Liquid Intelligent Technologies, MTN, Rain Networks, Telkom, and Vodacom,

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that generated R14.4 billion (ICASA 2022) in March 2022. This focused on the frequency spectrum in the 700 MHz, 800 MHz, 2600 MHz, and 3500 MHz, which will potentially help to enhance competition in the mobile services sector, increase broadband connectivity, and narrow the rural–urban divide. At the time of writing this chapter, these changes had not had full effect.

Conclusion As shown in the paper, the recent experiences on coping with the fallout from the COVID-19 pandemic have amply highlighted the challenges emerging from the digital divide. The digital age presents South Africa with new opportunities to achieve economic and social inclusion. However, harnessing these new digital opportunities for growth, jobs and inclusion will require addressing the current digital divide that risks leaving many South Africans behind. The ultimate goal of any strategy to bridge the digital divide should go beyond access and focus more on increased usage and impact. However, harnessing these digital opportunities will require coordinated effort, not only across government but also acting in unison with the private sector and civil society to select and implement a digital pathway for the country that leaves no one behind. The pathway will involve progressive and affirmative change in business models that price products and services. Government action spans across supportive fiscal measures; facilitating partnerships between government research agencies and non-governmental actors to improve cost-effectiveness of technological innovations; spectrum distribution that supports cost reduction and regulatory policy that deals with the deeprooted problem of incumbency; and providing financing to SMMEs through DFIs to fast-track TVWS provision, especially in underserved areas. South Africa will need a social compact among all stakeholders to make this coordinated action deliver digital inclusion.

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CHAPTER 12

From “Crisis Compacting” to Resilient Social Contracts: Emerging Lessons from COVID-19 Erin McCandless

Introduction: COVID-19, Building Back Better, and Resilient Social Contracts COVID-19 as a multi-dimensional global pandemic is testing the viability of social contracts across states and societies nationally and at the global level. It is revealing the deep flaws and failures of policy visions that should sustain the environment and human livelihoods, the fragility of institutions across sectors, and the profound incapacities of states to harness societal compliance where trust and a sense of national belonging and inclusion have not been cultivated effectively. The pandemic is spotlighting the failures of governments to act in coordinated, coherent ways, both internally and internationally (Erasmus and Hartzenberg 2020;

E. McCandless (B) Wits School of Governance, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_12

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OECD 2020a, 2), amidst a growing questioning of the principles of multilateralism and disregard for our interdependencies. The profound inequalities within and between countries have been revealed more starkly as the pandemic and its effects attack poor and marginalized people and communities most severely—those least able to tackle them (OECD 2020a; Sachs 2020; Schwoebel and McCandless 2020). At the same time, this “critical juncture” offers opportunities to reassess and rework the rules of the game (Acemoglu and Robinson 2012), i.e., to radically transform collective visions, agreements, and failing systems and institutions, to uproot bad leadership and to usher in new talent (Harding 2020). The United Nations (UN) Secretary General, Antonio Guterres, argued in his speech for the 2020 Nelson Mandela Annual Lecture that there is a need for a “new social contract for a new era”—one targeting inequality, notably in our global institutions and with a view to fairer globalization. The Financial Times (2020) has similarly called for a “reset” of our frail, global social contract. For those seeking to influence change, the context of the crisis offers high levels of public expenditure, with flexible fiscal frameworks, and a rising willingness to motivate the adoption of new development models. It is being proven that behavioral change is possible, and that coordinated global action is required to address risks that affect everyone (OECD 2020b, 3). At the same time, as the crisis has revealed, it can foster inward-looking dynamics. Either way, societies globally are paying attention, and viewing themselves as deeply invested in the outcomes. A growing movement of policymakers and thought influencers are demanding that we “build back better” from COVID-19. As coined in the Sendai Framework for 2015–2030, this means utilizing disaster as a trigger to build greater resilience in society around disaster preparedness, and through the recovery and reconstruction process (United Nations Office for Disaster Risk Reduction [UNISDR] 2015). Broadening in use through COVID-19, it now suggests the need to understand complexity, apply evidence-based and risk-informed analysis, and pursue policy and institutional coherence and coordination toward transformative ends. Building back better in the COVID-19 context is being tied to the need to address the underlying causes of vulnerability, conflict, and fragility—including inequality, weak governance, and degradation of the environment (Guterres 2020b; OECD 2020c; McCandless 2021). New social contracts that harness interdependencies (Veglio 2020) and foster inclusion to build more coherent societies (Guterres 2020a, b; Hussen

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2020) are part of this. The Sustainable Development Goals (SDGs) as a framework to guide post-COVID recovery are gaining momentum, as the view is that this universal agenda provides a transformative and sustainable development path (Guterres 2020b; OECD 2020a), although critical perspectives suggest that they do not go far enough and, at the core, remain an economic growth model (McCandless 2016; Eisenmenger et al. 2020). Cognizant of the challenges and opportunities being unearthed by the pandemic, this paper asks the question: how can COVID-19 responses support building back better and, in the process, strengthen national, resilient social contracts? At the most basic level, a social contract is “a dynamic agreement between state and society, including different groups in society, on how to live together” (McCandless et al. 2018, 10). While the term can be used descriptively, normatively, and heuristically (UNDP and NOREF 2016), this analysis engages the latter two uses as a conceptual tool to aid analysis, and as something that is aspirational: to build back better, we need social contracts that are resilient, adapting, evolving, and sustaining in ways that transform in the face of crisis, and that hold promise for ever-greater levels of well-being for all in society (McCandless et al. 2018). In the light of this, social contracts go well beyond the notion of the social compacts often used by governments, including that of South Africa, to convey pacts between key stakeholders—notably government, business, labor, and civil society—on key development priorities or sectoral issues (Mapungubwe Institute for Strategic Reflection [MISTRA] 2014). This conceptualization also moves beyond the common, classical understandings of the social contract as agreement reflecting the mutual rights and responsibilities of states and society, with necessary trade-offs between rights and freedoms. This is because social contracts in crisis build upon efforts by scholars and policymakers to explore the concept’s utility in contexts of conflict, fragility, and a fraught transition (UNDP 2012; Kaplan 2017; McCandless et al. 2018). Such contracts are resilient not just in the minimalist sense of adapting or weathering a crisis, but because they allow for adaptive responses to crisis (Zahar and McCandless 2020), where political and social actors are better able to “steer social and political change in ways that may contribute to transforming conflict structures and fostering shared benefits of peace and development” (McCandless and Simpson 2015, 3).

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These are important questions for South Africa, where one would be hard pressed to find an objector to the notion that building back better must inspire and guide thinking and practice beyond the pandemic. The economy is in deep crisis, with increasing inequality and rising poverty and debt, alongside a spiraling loss of jobs, all exacerbated, profoundly, by the COVID-19 lockdown. The nation is deeply divided across political and social, and racial and class realms, as the capacity of the state to deliver services fails to improve, and corruption reigns, despite attempts to halt and transform state capture. While President Ramaphosa has consistently used the notion of a “social compact” to frame his efforts for postCOVID economic recovery, many believe that a transformative vision to tie COVID-19 recovery to building back better, in ways that meet needs while addressing structural legacies, promote social cohesion and societal stability, and place the country on a path to environmental resilience, are lacking (Creamer 2020; Hartford 2020). The paper now draws upon two sets of cases and evidence to build an argument and develop recommendations for how South Africa and other countries can build back better with an eye to forging and strengthening resilient social contracts. The next section explores what drives resilient social contracts on the one hand, and the following section explores what drives successful COVID-19 responses. A synthesis analysis is then offered. Drivers of Resilient Social Contracts and Effective COVID-19 Response Forging Resilient Social Contracts How are resilient social contracts forged and maintained in our complex world? A nine-country research and policy dialogue project (from 2016 to 2018) addressed this question, focusing on countries emerging from conflict, fragility, and authoritarianism: South Africa, Zimbabwe, South Sudan, Tunisia, Yemen, Nepal, Bosnia and Hercegovina, Cyprus, and Colombia.1 Three “drivers” of resilient social contracts—as conceptualized above—were postulated in the research (McCandless et al. 2018) as:

1 An esteemed international advisory group supported this work, directed by the author (see www.socialcontracts4peace.org). Case studies were led by national authors.

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political settlements addressing core issues of conflict in increasingly inclusive ways; institutions delivering fairly and effectively; and social cohesion broadening and deepening. The research findings, and policy and scholar dialogues around them, broadly validated the importance of these drivers. Several other findings stood out: The reasons for fraught transitions often lie in the failure to effectively tie political settlements to institutional commitments and mechanisms to address them in inclusive ways that enable the transforming of core issues of conflict.

This occurred across case countries where transitional mechanisms were missing, deeply ineffective, or veered from agreed mandates (Cyprus, Nepal, Zimbabwe), or where transitional agreements embraced competing concessions. In South Africa, provisions were made to protect white-owned businesses and individual property rights, trumping radical land and resource distribution and wider group rights (as embraced in the ANC’s Freedom Charter). These trends, along with state capture of institutions by post-transition governments, undermined the state’s ability to address the structural legacies of the apartheid era and to create a framework capable of realizing a national vision (Ndinga-Kanga et al. 2020). Across all countries, core issues of conflict and division were addressed ineffectually through these processes (McCandless 2020; McCandless et al. 2018). As reflected in the 2016 UN Security Council and General Assembly resolutions (A/RES/70/262 and RES/2282), there is wide policy consensus that addressing the root causes of conflict, or alternatively grievances, is a prerequisite for sustaining peace. State institutions regularly fail to deliver on their mandates, especially the needed integration across sub-national structures and systems; protests are an expression of societal dissatisfaction with failure of service delivery and lack of government accountability, as well as lack of faith in governance and grievance recourse mechanisms. Across all studies, the states did not effectively deliver services, whether for lack of capacity and resources, or corruption or state capture (McCandless et al. 2018). Protests about these issues have occurred in all

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countries studied. South Africa’s flourishing protest movements can be viewed as pushing the boundaries of the political settlement to become more inclusive, demanding that it speaks better to the realities and needs of ordinary people (Ndinga-Kanga et al. 2020, 37). More importantly, protests and other resistance measures can indicate that societal expectations of the social contract are not being met and show society’s capacity and willingness to make demands upon the state. Whether a resilient social contract arises, however, depends upon the state’s response. State violence in responding to protest has resulted in civic outcry (South Africa, Nepal, Tunisia), or fear of protesting (Bosnia and Hercegovina, Zimbabwe) (McCandless et al. 2018). Social cohesion is deeply connected to progress in the areas of inclusive political settlements addressing core issues of conflict, and institutions delivering fairly and effectively. All the studied countries indicated that legacies of state formation, and poor progress in achieving an inclusive political settlement (driver 1) and in providing fair service delivery (driver 2) affected vertical cohesion. Also, horizontal intergroup cohesion tends to be negatively affected by polarizing political dynamics and non-inclusive governance processes (McCandless et al. 2018, 54). In South Africa, the unifying “rainbow nation” identity that accompanied the end of apartheid and held promise for greater social cohesion did not flourish amidst poor progress on righting the deeply unequal distribution of services across racial, class, and gender lines (Ndinga-Kanga et al. 2020). While the international community supports countries in these contexts in many vital ways, their positioning often undermines the ability to address core issues of conflict and to forge state-society social contracts. Despite the varied, supportive ways in which international actors influence the forging of national social contracts, they also can undermine these efforts. A concerning trend involves agreements that governments reach with international financial institutions (IFIs)—notably the World Bank and International Monetary Fund—that have undermined the ability of national actors to realize agreements, i.e., around the economy, that would cause political settlements to become increasingly inclusive and address core issues of conflict. Tunisia had a home-grown, bottom-up revolution with an impressive civil society coalition facilitating key aspects of the transition process (Mahmoud and Ó Súilleabháin 2020). A decade on, however, severe

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economic challenges compromise the country’s ability to actualize its widely owned national vision. While some say that a core challenge is transforming the rentier dimensions of the state (Cammack et al. 2017), civil society groups and labor unions point to the need to break from the rules of the game, which are embedded in IFI policy prescriptions that lack context sensitivity and inclusion (Taboubi 2019). Similar historical experiences and concerns exist in many of the countries. The study ultimately underscored the importance of these drivers, and their mutually reinforcing nature, in forging and achieving resilient social contracts. COVID-19 Response and Success—What Are We Learning? Countries that are doing well in their responses to tackling COVID-19 logically have more immediate opportunities to build back better across sectors, systems, and levels, and to strengthen resilient social contracts. South Korea absorbed lessons from the 2015 MERS outbreak, transforming its disease-prevention legislation. It developed early warning and rapid diagnosis and response capacities, and increased transparency in its communications with society (Kim 2020; Kwon 2020; Oh et al. 2020). It is widely considered, among a number of others, such as Iceland, Vietnam, and New Zealand, to be a success story in combatting COVID-19 to date. While historical and social contexts undoubtedly shape the nature of responses and outcomes, understanding factors driving effective COVID19 responses across countries can support the drawing of lessons. Such analysis is flourishing, with many theories vying to explain success. Box 21.1, and the narrative analysis that follows, present nine commonly cited success factors derived from a wide array of evidence-based studies and reflections (see reference list). The analysis then focuses on three countries commonly cited as excelling (South Korea), not doing well (the USA), and having mixed results (South Africa). While there is no consensus on which data are most telling for COVID analysis, Table 12.1 illustrates the significant variance across the three cases in terms of numbers/proportion of national cases and deaths per million, which informed this case selection. Examining the cases, it is clear that South Korea and the USA reveal stark differences across these factors and numbers, even despite South Korea’s surge in recent months. At the time of originally conducting this research, in 2020, and then in 2021, the cases per million were very

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Table 12.1 COVID-19 comparative data: USA, South Africa, South Korea

USA South Africa South Korea

Cases per million

Active cases

Deaths per million

Tests per million

Population

243,160 61,056 160,692

23,663,746 14,743 N/A

2976 1647 224

2,897,675 38,7665 30,7806

334,305,317 60,580,760 51,344,266

Source McCandless, derived from https://www.worldometers.info/coronavirus/#countries

low (269 cases per million on June 1, 2021). South Korea was widely lauded for early recognition, innovative and science-led responses, along with rapid action across well-coordinated spheres and levels of government (Normile 2020; Yoo et al. 2020). Conversely, the entire government response confronted political fragmentation across agencies and structures in the USA, which has been widely critiqued for divisive, ideologically based responses, putting politics ahead of public health. It has also been said to account for slow action and the pandemic’s rapid growth in the country (Friedman 2020; Fukuyama 2020; Thompson 2020).2 While both South Korea and the USA developed economic stimulus plans and multi-dimensional packages to address vulnerable populations, South Korea’s universal health care, with generous crisis provisions, is credited with minimizing the financial burden for all (Kwon 2020). Its top-rated healthcare system separates COVID and non-COVID efforts, developing triage centers down to the district level (Oh et al. 2020). Box 12.1: Nine Factors Explaining an Effective COVID-19 Response Early recognition and action—i.e., mapping the spread of the virus, testing massively and rapidly, tracing and quarantining (Bremmer 2020; OECD 2020d; Oh et al. 2020). The rate at which states have adopted stringent measures has played “a critical role in stemming the infection” (University of Oxford 2020). Science-based leadership—i.e., applying science at the highest levels of decision-making (Blackburn and Ruyle 2020; Ramalingam et al. 2020).

2 Polls, however, suggest that the majority of Americans place trust in the advice of the medical experts advising government on the crisis (Fukuyama 2020).

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Economic stimulus packages—i.e., including providing safety nets for businesses and vulnerable populations (Bremmer 2020; OECD 2020a). Targeting vulnerable populations—i.e., at all levels of government, through safety nets, grants and well-designed stimulus packages capable of achieving their intended impact (OECD 2020a; Van den Heever 2020b). Effective government coordination—i.e., fit-for-purpose crisis platforms; coordination from center of government and whole-of-government response; effectively and transparently engaging with sub-national levels and key stakeholders through the use of different media, including mass media, social media, and technology; policy coherence (Bremmer 2020; Kwon 2020; OECD 2020b; Oh et al. 2020). Strong capacity of the health system—i.e., ability to conduct widespread and extensive contract tracing, testing, isolation, and quarantine; high numbers of intensive care beds and trained healthcare workers (Bremmer 2020; Oh et al. 2020). Transparency and effective government communication with public— i.e., transparency, consistency, and use of different media, including mass media, social media, and technology (Bremmer 2020; Kwon 2020; Van den Heever 2020b). Trust in government and voluntary societal compliance—i.e., high levels of voluntary compliance with government crisis dictates; societydriven or bottom-up efforts (Oh et al. 2020; Kim 2020; Van den Heever 2020b). Higher levels of trust in government (Bargain and Aminjonov 2020) and in science3 correlate with higher levels of compliance. Security sector respecting human rights—the responsibility of states; heavy-handed security may flatten the curve in the immediate term, but will undermine trust in and legitimacy of government and respect for law, which link to societal compliance (Kasambala 2020; McCandless and Miller 2020; Sambala et al. 2020). Source Authors’ review.

Compliance has been stronger in South Korea and is tied to transparent information sharing and the use of technology—even surveillance—for effective community engagement (Kwon 2020; Levkowitz 2020). In the USA, media polarization and the propagation of fake news are common (Mitchell and Oliphant 2020), and the government has propagated confusion around the value of compliance. Surveys point to low levels 3 Those higher on religious orthodoxy, political conservativism, and conspiracy ideation trust science less and comply less.

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of understanding of the government’s approach and a lack of trust in the leaders’ handling of the situation (Friedman 2020). It is worth noting that South Korea’s rapid upsurge in cases in the first few months of 20224 has been attributed to the omicron variant sweeping across not just the country but region; lifting of social distancing and reducing of other restrictions such as enforcing vaccine passes and abandoning its “trace, test, and treat” approach in recent months—in response to pressure from business that such measures were harming them. While infection numbers have grown rapidly, mortality rates are still very low compared to other countries, notably South Africa and the USA. This is attributed to high vaccination rates; nearly 87% of the population has been fully vaccinated, and 2/3 of South Koreans have had booster injections (Made for Minds 2022; The Guardian 2022; France24 2022). South Africa took rapid action from the start, taking productive steps to address the adverse effects of the pandemic, including engaging with top scientists and stakeholders in crafting the initial public policy responses (Devermont and Mukulu, 2020; Gavin 2020). As it has done traditionally, it applied the discourse of a social compact across sectors. Online resource portals were developed to enhance transparency. A stimulus package (R500 billion, or 10% of GDP) was introduced, targeting hunger and social distress, and offering support for companies and workers. The various fiscal measures are discussed in greater detail in Chapter 5. However, fissures in the approach soon materialized. Scientists publicly attacked the process, demanding transparency, as government kept their advice hidden (Cowen et al. 2020). Lockdown regulations were deeply contested and critiqued for incoherence and insufficient explanation and warning (Alex van den Heever, personal communication, 2020; Cowen et al. 2020). Other cited issues included poor government coordination across provinces, private sector testing strategies, polarized agendas, clumsy messaging (Costa 2020; Heywood 2020a, b; Harding 2020), and heavy-handed security sector responses, primarily in black townships (Human Rights Watch [HRW] 2020; McCandless and Miller 2020). This was followed by high levels of non-compliance (Cairncross and Gillespie 2020; South African Government 2020), while the longer-term effects of

4 https://ourworldindata.org/coronavirus/country/south-korea.

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some three million people losing work during the crisis hold painful implications for the pre-existing stark, unequal, spatial, and racial geographies. As is common elsewhere, the vulnerable were hit the hardest: the harshest employment declines occurred in populations that are poor, unskilled and less educated, rural and female (Spaull et al. 2020). The initially praised government stimulus package was roundly critiqued for amounting to a net increase in non-interest spending of less than 1% of GDP, and pursuing austerity measures cutting back on essential government programs (Budget Justice Coalition [BJC] 2020; Heywood 2020a), and the supplementary budget of R21.5 million, for lacking a spending strategy (Van den Heever 2020c). Interventions to pump money into vulnerable households were undermined by the lack of registration processes and poor local data (Alex van den Heever, personal communication, 1 August and 29 October 2020; Moore et al. 2020). On a positive note, the recovery strategy’s Caregiver Grant, affecting onethird of the country (98% of recipients are women), has been renewed, largely because of strong pressure from civil society (Activists for Women and Children 2020). Government coordination also came into the spotlight, with the National Coordinating Command Council (NCCC)—an ad hoc structure established to lead the crisis response—deeply criticized for circumventing and displacing constitutional, parliamentary, and legal instruments and process oversight, ultimately creating space for the abuse of state power (Erasmus and Hartzenberg 2020; Legalbrief 2020; Van den Heever 2020a). Corruption in supply and distribution processes was rampant; 2/3 of contracts have come under investigation, with public outcry over an ongoing display of impunity (February 2020a; Merten 2020, Van den Heever 2020a). Platforms for participation were considered woefully inadequate, and collective statements by academics and civil society providing analysis and recommendations to address the pandemic were not taken seriously by government (Heywood 2020a, b; Patrick Bond, interview, August 2, 2020). The government’s premier dialogue mechanism for achieving a social compact—the National Economic Development and Labour Council (NEDLAC)5 —sought to build dialogue around a COVID-19 response. This gave rise to the government’s Economic Reconstruction and 5 NEDLAC was set up in 1994 in an early act of the new post-apartheid parliament to advance dialogue in the public interest.

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Recovery Plan, targeting jobs, industrialization, and crime and corruption. These were not surprising priorities when considering the importance placed on them by South Africans, as a recent survey suggests; the top worry is unemployment (59%) and the bottom is COVID-19 (24%) (BusinessTech 2021). However, this plan has also received criticism—it offers nothing new, effectively reiterates plans that have failed to be implemented to date, and, critically, offers no insight into how to tackle the humanitarian crisis (Mathe 2020). Despite its own view of its many successes, many argue that it has not achieved its goals of achieving a social compact over time—to achieve real consensus on a development path between government, labor, business and community organizations in South Africa. Its failures are deemed to be the result of exclusivist representation—viewed, e.g., as an elite club of big business, big labor, and big government—of the labor, trade, and industry ministries (Hartford 2020), and because of the deep distrust of stakeholders vis-à-vis the government. Others point to its failure to link efforts to a national vision, its undermining of a sense of belonging (MISTRA 2014, 9), and a lack of government capacity to implement agreements (Gumede 2012). These are important lessons when reflecting on what works, and what doesn’t, in a social compact. The capacity of the state to take quick action, particularly through its health sector, clearly matters. Yet, it is not everything, as Fig. 1 illustrates; the USA has similar levels of human development, adjusted for inequality, as South Korea. While the USA has strong institutional capacity, effective delivery requires strong leadership and government coordination to enable the harnessing of a national vision behind which citizens can rally in a unified way. Science-based leadership when confronting a pandemic is vital, but employing it effectively requires more—government and societal buy-in and compliance with its dictates. South Korea’s ability to elicit compliance ensured that the country did not have to shut down its economy (Van den Heever 2020b). Effective early action requires being sensitive to contexts. In South Africa, full compliance was never feasible in the high-density townships and informal settlements, where people often live in extreme proximity (preventing social distancing) and 56% of the population does not have a tap (preventing regular handwashing) (Magongo et al. 2020; Patrick Bond, personal communication, August 2, 2020; Van den Heever 2020b). South Africa is hardly unique; in sub-Saharan Africa, some 57%

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of urban residents live in slums (World Bank 2020). While South Africa, South Korea, and the USA put forth stimulus packages, many countries cannot afford this. At a basic level, as argued by Tedros Adhanom, director of the World Health Organization (WHO), effective responses require leaders taking action, and citizens embracing key measures.6 This suggests that, at the heart of responding effectively, are quality social contracts. It is clear from the USA how societal polarization undermines effective responses. This is reflected by citizens who are willing to risk their lives to protest against lockdown regulations—some because they do not believe how the pandemic spreads, and others to address the country’s structural legacies of racial injustice. Unaddressed structural legacies, or “prior constraints” (South African Technology Network [SATN] 2020, 17), can undo good intentions and plans to do things differently in a crisis response. In the case of South Africa, despite strong leadership at the top, corruption and cronyism, mixed with economic stagnation, have left hollowed-out, weak institutions and a bloated civil (public) service (February 2020a; Harding 2020; Makgale 2020), and “shallow and technocratic” mechanisms of public participation (February 2020a). Other constraints and legacies include extreme horizontal inequalities, fragile media-government relations (Mkhize 2018; Makgale 2020), low levels of trust in government (Afrobarometer 2018; Edelman 2020), and a low sense of South African identity or belonging.7 A deep economic crisis was also in place prior to the start of the pandemic. It is clear that COVID-19 is a threat multiplier, exacerbating structural legacies and intensifying contemporary socio-economic and political challenges. The above analysis suggests lessons to inform the framing of and priorities for building back better in transformative ways that strengthen and support resilient and inclusive social contracts.

6 https://twitter.com/i/timeline. 7 The 2018 Afrobarometer polled South Africans’ sense of identity, first with race

(51.4%), followed by language, religion, economic class, and last, being South African (18.8%).

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Lessons and Insights for Strengthening Social Contracts in Times of Crisis As evident from the above, inclusive political settlements, wellfunctioning institutions and social cohesion can be considered drivers of resilient social contracts. An effective crisis response, while bringing new contextual imperatives to the forefront, unveils the importance of similar priorities that should inform framing and actions. This section merges the “three drivers” of framing a resilient social contract with a crisis (COVID-19) lens to revitalize and improve thinking, policy and practice. Three Synthesis-Framing Priorities The three synthesis-framing priorities involve the need to: ● Tie crisis compacts to broader national visions and policy frameworks that target vulnerabilities and transform structural legacies. At its core, building back better suggests tying crisis response efforts (and the associated social compacts) to wider, transformative national (and regional and global) visions and agreements. Centrally, and as illustrated in the preceding case analyses, pre-existing structural legacies and core issues dividing societies hold great potential to unravel strident efforts to do things differently, and better. Placing vulnerability and risk analysis at the heart of planning and implementation from the outset will support the realization of more robust, inclusive and transformative national visions, and these need to be tied to fit-forpurpose policy frameworks. Crisis offers new opportunities to reset the rules of the game at different levels. Addressing inequality and other forms of vulnerability requires restructuring the rules, norms, and institutions of the political economy. While this is the right thing to do ethically, other compelling reasons are clear. It is demanded by the common threats to our environmental and human security. People will not cultivate a sense of trust in the state and belonging if they are left out of development. The SDGs and their transformative pledge to Leave no one Behind offer a vision for this. While there are many political obstacles to their realization, the opportunities offered by the crisis to advance them, as described in the introduction, should be seized.

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● Create effective crisis platforms, resilient health systems, and coherent and transformative institutional arrangements. How can crisis-driven governance structures and platforms provide opportunities to transform stagnant, weak, or corrupt institutions and processes into more adaptive8 and evidence-based leadership approaches? As both sets of analyses reveal, this needs to be the focus of stakeholders in dialogue, to include civil society and private sector partners who collectively identify challenges and priorities, mobilize resources, set, implement, and monitor action plans, and build ownership of agreed national goals. Countries are experimenting, many successfully, with institutional arrangements to cultivate multi-level coordination bodies aimed at preventing fragmented responses (OECD 2020a). Regional issues and actors also need to be engaged with meaningfully to ensure transnational coherence and collaboration. Resilient health systems entail awareness of the multi-dimensional risks and capacities in play, foster inclusion across mechanisms and institutions, and synergize responses across sectors and governance levels. Systems thinking is being employed to map and understand the supply, demand, and contextual factors and their interactions to support resilient health systems. Often missed in the otherwise valuable WHO guidance for strengthening health systems (WHO 2010) is the need for an analysis of multi-dimensional risks, and how they will influence vulnerabilities and system performance (Papoulidis 2020a). Countries need dual capacities to address ongoing health services and the demands of crisis situations (Papoulidis 2020a). South Korea clearly understood this when crafting a COVID-19 response strategy that capitalized on its strong institutions. While the literature tends to focus on coping and adapting dimensions of resilience, often critiqued for placing a burden on those affected by disasters and conflict, the transformative dimension is more suitable for addressing structural legacies and drivers of conflict and fragility (McCandless and Simpson 2015) and building back better. This is not uncomplicated, given the nature of international, transnational, and domestic drivers intermixing in complex ways that must inform transformative resilience (McCandless 2019, 30). The rising social movements 8 Adaptive leadership—the ability to collectively identify the effects of interventions (and their combinations)—is gaining traction as a method to manage disease outbreaks (Ramalingam et al. 2020, 3).

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and protests, even in the context of lockdowns and health risks this poses during a pandemic, suggest the agency and resilience of citizens across contexts globally. These protests commonly feature demands reflecting transformative changes in the way state institutions are delivering and the resulting deliverables—notably in terms of fair and effective service delivery, and in tackling inequality and exclusion. They also are persistently confronting the conditions placed on countries by international financial institutions—which are often viewed as not in synch with the social contract that societies desire (McCandless 2021). Place Social Cohesion at the Center of Policy Design and Implementation Weak social cohesion is often correlated with poor economic growth and conflict, while strong social cohesion conversely is correlated with higher per capita income and employment levels (Agence Française de Développement [AFD] 2018; UNDP 2020). At the heart of social cohesion across diverse conceptualizations and measures lies trust, without which societal compliance with realizing stringent crisis response plans will be deeply challenged. As COVID-19 responses have illustrated, overly militarized approaches undermine trust in the state and its institutions, particularly when they are unevenly deployed across geographical spaces. This suggests a social contract of coercion rather than consent (HRW 2020; McCandless and Miller 2020; Sambala et al. 2020). Similarly, corruption breaks trust, and “the sacred contract between the people and their elected representatives is broken” (February 2020b). Social cohesion should not be pursued in ways that reduce political challenges such as inequality and injustice to cultural explanations (Nkondo 2015; Abrahams 2016). This is precisely why the growth of social cohesion requires structural legacies that continue to divide people to be addressed, as is evident from the research above on social contracts (McCandless et al. 2018). In South Africa, for example, poverty, unemployment, and service delivery protests are negatively correlated with social cohesion (AFD 2018). The rising polarization between states and societies globally also illustrates the failure of governments to establish a social contract reflecting care for all of society. Popular distrust of governments across Africa has fueled self-reliance and innovation by communities at the local level (Wilén 2020). There are expansive social solidarity networks around the world (e.g., the People’s Coalition 2020; The Detail 2020), meeting

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needs and nurturing the resilience of communities (McCandless and Miller 2020). Engaging with and drawing upon these capacities in crafting national response strategies will support and increase government legitimacy and strengthen social contracts with society.

Conclusion: Implications for South Africa President Ramaphosa has employed the language of social compact in the context of COVID-19, as he has often done in the past on policy issues, yet it has been narrowly tied to restructuring the economy to achieve inclusive growth (McCandless and Miller 2020). A host of critiques suggest that there is little new in the President’s Economic Reconstruction and Recovery Plan, which is rooted in austerity measures deemed to undermine social protection and transformation (Activists for Women and Children 2020; October 19, 2020; Patrick Bond, personal communication, August 2, 2020; Rashnee Atkinson, personal communication, October 28, 2020). The narrow-framing does not tackle the multidimensional risks and areas of fragility that are being compounded by the pandemic, nor engage with the diversity of needs, everyday experiences, and vulnerabilities of South Africans. The crisis reveals fragilities in South Africa’s formalized yet “unsettled” political settlement9 —which, over two and a half decades, has not sufficiently addressed the structural legacies to achieve the anticipated inclusive outcomes. A more inclusive settlement requires determined action to transform well-known (1) competing policy imperatives (at the heart of which, broadly, are economic growth and redistribution), and (2) continuing propensities and avenues for state capture and corruption. However, the mindboggling COVID-19-related looting of resources reveals that the government’s efforts to address state capture are not yet making much everyday difference. Judith February argues that the President needs to take more radical, decisive action and spend the political capital offered by the crisis to transform the economy and governing institutions and, more radically, tackle government corruption (Gavin 2020). Merten (2020) observes: “what must be put right is the institutional and political culture that allows officials and the politically connected—as 9 This term describes how disagreements at the heart of conflict translate into political and legal institutions, which become the basis for continuing negotiation (Bell and Pospisil 2017).

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the saying goes—to chow.” This requires tackling polarization within the ANC, which would involve whether or not to protect high-level member from corruption charges, and what constitutes a suitable pathway for economic transformation (Booysen 2021). Environmental and ecological sustainability needs to be at the center of a bold vision toward a green, inclusive future for all, while breaking down the walls of social division rooted in deep inequalities (Hartford 2020). More resilient and accountable institutions and effective coordination across government cannot be fashioned overnight, particularly in a crisis. Devising a coherent strategy for building back better nonetheless demands greater cohesion and capacity development across government (including making merit-based appointments), serious investment in improving data collection and analysis, and applying the data critically, at different levels of government (Rashnee Atkinson, personal communication, October 28, 2020). It also demands a robust commitment to transparency, and more concerted, genuine, and participatory societal engagement in deliberating about South Africa’s democratic path (February 2020b). Despite South Africa’s myriad social cohesion policy efforts,10 this driver of a resilient social contract will unlikely grow until inclusive development outcomes, which are at the heart of a more socially integrated society, become more apparent. The ongoing assessment and development of a new social cohesion strategy (or “compact”) is under way (as this paper was produced) and is confronting this challenge. While the 2012 strategy was driven by the Department of Sports, Arts and Culture, a strong tide of concern in consultations for the new version has focused on poverty and inequality as key obstacles to social cohesion. Yet, this is not something the department can tackle on its own. Stronger social cohesion also requires stronger trust in government and vis-à-vis other groups and citizens in society, and a sense of belonging and inclusion. Critically, the security sector demands attention and transformation: 2/3 of polled South Africans do not trust the police, and 50% view them as corrupt (Afrobarometer 2018). Greater trust and a sense of belonging will grow the legitimacy of government, and also greater voluntary compliance with government dictates when needed.

10 Social cohesion lies within South Africa’s NDP Vision 2030, and is one of seven government priorities (https://www.gov.za/issues/key-issues).

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Building back better from COVID-19 is by all accounts a gargantuan task for governments, societies, and communities, and for our international institutions. This analysis has sought to draw insight and evidence from studies on how resilient social contracts are forged, and on successful COVID-19 response efforts. The framing, analysis and recommendations seek to build upon scholarly and policy work focused on finding innovative pathways to address our common crisis and build back a better world. It is hoped that this analysis can contribute to the vital, collaborative movement of thought and action. Acknowledgements I would like to thank Kennedy Manduna, who provided valuable research support to this study.

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Interviews Alex van den Heever, School of Governance, University of Witwatersrand, 1 August 2020 and 29 October 2020. Gustavo de Carvalho, ISS, Institute for Security Studies, 5. Patrick Bond, University of the Western Cape School of Government. 2020, August 2. Rashnee Atkinson, Housing Development Agency, National Department of Human Settlements. 28 October 2020. September 2020.

CHAPTER 13

Conclusion: Building a Resilient State and Inclusive Society Mzukisi Qobo, Mills Soko, and Nomfundo Xenia Ngwenya

This edited volume, consisting of thirteen chapters that explore various dimensions of the COVID-19 crisis and its ramifications for South Africa, was conceived as a research project at the onset of the global pandemic. The scholars whose chapters are featured in this book analyze the role that social, fiscal, industrial, and competition policies could play in spurring

M. Qobo (B) Wits School of Governance, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] M. Soko Wits Business School, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] N. X. Ngwenya Wits School of Governance, University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0_13

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economic recovery in light of the enormous social and economic damage wrought by the pandemic. They also examine how policymakers could bolster state capabilities in order to respond to and counter the social and economic effects of COVID-19. Furthermore, they dissect the impact of the COVID-19 pandemic on labor market conditions and the lessons that could be gleaned therefrom about the future of employment. They also discuss three areas that are poised to play a vital role in driving future economic revitalization—namely, digital futures, the role of state-owned enterprises, and energy transitions. These topics are examined through a socio-economic prism that draws on history, approaches to state-market relations, as well as public policy analysis. There are several global historical lessons that South African policymakers can deploy as a framework for shaping the future economic policy and growth trajectory. The most significant lesson is that the state has a central role to play in tackling health and economic crises, and in laying the foundation for post-crisis reconstruction. The South African government can exploit the COVID-19 emergency to enact longdelayed structural reforms to reverse the country’s economic stagnation and propel a new post-COVID-19 growth path. To do this, however, will require significant improvements in state capacities across the different spheres of government. There are policy options that are open to the South African state today. In the realm of public health, the state can channel funds secured from multilateral development banks to provide scientific and other infrastructures that are key to building the resilience of the national health system against future pandemics. Government must have a clear and purposeful strategy to shore up the national innovation system and strengthen the country’s centers of excellence so as to ensure the country’s scientific and technological base. Further, there is a need for local authorities to depoliticize community interventions. Without de-politicization of these interventions, the government will struggle to secure community participation in its prevention, testing and vaccination plans. Furthermore, the institutional edifice of the public health system needs to be reconfigured, and funding constraints ought to be dealt with in tandem with bolstering the institutional capabilities of both provincial and local governments. In the economic sphere, the South African government ought to recognize the unprecedented severity of the COVID-19 global pandemic and even be prepared to implement

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unorthodox fiscal and monetary policies to revitalize the country’s beleaguered economy. The fundamental preoccupation of its interventions must be to protect jobs, support the development of local production capacities, and ameliorate social dislocations caused by the crisis. Tackling grand challenges requires strengthening institutional capabilities of the state across different spheres of government especially at the coalface of public service delivery at the local level. There is a need to broaden the horizon of public policy innovation to deliver effective developmental outcomes. This is not about more state or less state, but a different type of state: one that is characterized by innovative institutions, embodies public value, and is able to act as an investor of first resort, catalyzing new types of growth, and in so doing crowd in privatesector investment and innovation—these are in essence functions about expectations and about future growth areas. The emphasis is on building collaboration between state and business, as well as about picking the willing than picking winners. The public sector bears responsibility for the long-term resilience and stability of societies, and for shaping public outcomes through policy-making and public institutions. The COVID-19 pandemic and its aftermath offer an opportunity to rethink the foundation of public sector capacity and to align it with the needs of the twenty-first century, especially to address long-standing developmental challenges in South Africa. The performance and trajectory of the South African economy in the last three decades or so, indicative of stalled structural transformation and premature deindustrialization, suggests a need for a major rethinking of the country’s growth strategy. As with countries all over the world, the economic crisis precipitated by the COVID-19 pandemic has exposed South Africa’s underlying weaknesses and has helped to clarify the need for several urgent interventions. One of the urgent interventions that ought to be considered is a closer integration of industrial policy and competition policy, with the overarching goals and strategies of the former guiding the development of the latter. There is a compelling case for deploying competition policy as a tool for opening participation in the economy, stimulating competitive rivalry, and disciplining and incentivizing firms to invest. It can also play a role in producing and building domestic linkages in support of industrial policy goals and national development strategies. Achieving these policy goals will require the growth and development of competition policy beyond the constraints of the existing competition law regime and its institutions.

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South Africa faces a serious fiscal crisis, which has been accelerated by the social and economic crisis generated by the COVID-19 pandemic. Although the government has contemplated short-term measures to tackle the crisis, its origins are deeper. It is a structural crisis that will define public policy over several years, if not longer. Following the outbreak of COVID-19, the fiscal position became profoundly unsustainable. If fiscal imbalances are not resolved, the burden of interest payments will quickly become intolerable. This makes the future willingness of the state to honor its obligations questionable. South Africa also needs tighter coordination between monetary and fiscal policy. For this con-ordination to be successful, a low and stable inflation environment is necessary. This is because nominal demand management policy shocks are unlikely to generate much inflation in the low inflation regime relative to the high inflation regime. In addition, the credibility of the conduct of monetary policy is enhanced in the low inflation regimes and this has positive effects on other factors affecting the inflation outlook, such as the exchange rate pass-through and wellanchored inflation expectations. The South African Reserve Bank (SARB) should also consider employing other potent central bank balance sheet tools, over and above bond purchases, that can be used to contribute to fiscal sustainability, price, financial, and macro-economic stability. In this regard, foreign currency reserves accumulation and open market operations in the form of repurchase agreements offered as a form of accommodation by the central bank to banks at the discount window, require special attention. The economic and social costs of the national lockdown imposed by the South African government have been disproportionately borne by several vulnerable groups such as less-skilled, low-wage, informal, and female workers. Of the 2.2 million less individuals employed in the first few months of the lockdown, employment loss was concentrated among the youth, those with lower levels of formal education, and those living in urban areas. Considering labor market characteristics, almost all employment loss was observed in the private sector, with the lockdown disproportionately affecting individuals working in the informal sector. Specifically, about 50% of total employment loss was attributable to the informal and domestic services sector, despite these workers accounting for just under 25% of pre-pandemic employment. What was observed was also some evidence of job protection among union members, with non-union members accounting for nearly 100% of employment loss.

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Although the tertiary sector accounted for two-thirds of employment loss, the secondary sector—particularly manufacturing and construction—was disproportionately affected. Low- and semi-skilled workers accounted for almost all jobs lost. Geographically, after accounting for national employment shares, the Northern Cape, Free State, and Limpopo suffered the largest relative employment losses. Considering outcomes other than employment, there were notable changes in the distribution of working hours, and the substantial increase in inactivity. This latter observation was characteristic of the national lockdown policy, which induced an inability for both job-losers and job-seekers to engage in the labor market. Although it is clear that the COVID-19 pandemic and subsequent national lockdown have had a substantially adverse effect on the South African labor market, it is important to note that the analysis presented in the book serves as a set of initial estimates. Subsequent analysis may entail the use of occupation data to further fine-tune control group criteria, and as more data is released, an investigation can be undertaken of the effects on alternative labor market outcomes other than employment, such as wages. Availability of this latter data will also permit an examination of heterogeneity in effects across the wage distribution. Importantly, more data will provide new information on the nature and extent of recovery in the labor market as well as the scale of permanent job destruction across the South African economy. The adverse impact of COVID-19 on the labor market has also tested the resilience of the social security system and further exposed its weaknesses. Despite various policy processes dedicated to the identification of priorities for reform, very little has changed since 1994 apart from scaling up certain social assistance benefits and making some minor entitlement changes to the UIF. The set of programs that presently make up social security in South Africa are of insufficient scope and design to address the structural causes of inequality, poverty, and unemployment in South Africa. While South Africa has some unique contextual features, many of the prevalent social outcomes are arguably the expected consequence of an under-developed social security system. South Africa, therefore, needs to prioritize the design and implementation of a comprehensive system of social security. A priority in this process is the reconfiguration of the institutional framework for social security sufficient to accommodate a three-tier system for a comprehensive spectrum of risk prevention and mitigation measures. South Africa has a long path ahead to realize a comprehensive system of social security. After virtually no movement

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post-1994, it has become important for social cohesion and economic development to take more pronounced action. SOEs and DFIs are designed to act as strategic drivers of South Africa’s development agenda. As constituted, they are expected to be functionally efficient organizations, comporting with high standards and principles of ethical conduct and prudential corporate governance, acting accountably and transparently in the use of public resources and, above all, generating real and meaningful outcomes for the benefit of the poor and marginalized. The COVID-19 pandemic has exposed how wide and deep the cracks are in the country’s economic and social predicament. South Africa’s national objectives would be better met if SOEs and DFIs were consolidated under a single legal, policy, and operational ambit, rather than treating them separately, as seems to be the case. There is significant overlap between SOEs and DFIs in their basic function and strategic intent. Greater growth and development synergies can be unlocked by bringing them together, rather than having them function in strategic and operational isolation from each other. Given their ability to command market-related revenues and maintain and replenish market capitalization independently from the state, DFIs could significantly enhance the effectiveness of SOEs by directly and indirectly supporting their development functions and funding models. There is a strong case for repositioning SOEs and DFIs, especially in relation to the possible multiplier effects that could flow from engaging with the private sector through better alignment, complementarity, and coordination. There are obvious advantages for consolidating SOEs and DFIs under a single rubric and bringing in the private sector through public–private sector partnerships. It will allow for a clearer articulation of public policy; improve capacity building within state institutions; provide a better matching and synergizing of mandates and policy priorities; improve prospects for integrated planning; and enhance collaboration and coordination between the public and private sectors. Due to its stranglehold on South Africa’s economic growth and significant contribution to the country’s debt burden, Eskom stands out as the SOE that requires the most urgent reform. There is a pressing need for South Africa to transition into sustainable renewable energy generation in order to contribute toward the much-needed revival of the economy. Achieving this key objective goes beyond the notion of the need to restructure Eskom, important as this is in its own right. Technically, South

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Africa needs to separate the energy sector to its various segments and deal with power supply differently in the diverse segments. With appropriate and competent planning and coordination across SOEs and the banking sector, it is possible to change the dynamics of South Africa’s energy sector so as to make it a pivotal player in promoting: industrialization via the manufacturing of the required accessories for the solar sector; large-scale job creation; opportunities for upskilling and reskilling of young job seekers. The South African government has publicly pronounced its commitment to embrace renewable energy. However, renewable energy policy in South Africa has been thus far ineffective. Renewable energy currently contributes relatively little to primary energy and even less to the consumption of commercial energy. Investment in renewable energy is important to reduce the negative economic, social, and environmental impacts of energy production and consumption in South Africa. There is a need to invest in renewable energy production and to its full utilization by the population. However, neither setting targets nor regulating prices alone can be a sufficient independent policy option. Power purchase agreements, access to the grid, and creating markets for green electricity are some supporting activities that should be considered. South Africa’s strategy for renewable energy should leverage regional energy value chains for development. Regional energy value chains can help uplift poor communities. In addition, including poor communities in value chains could unleash an enormous reservoir of human potential and result in more sustainable economic growth in South Africa. However, inclusive businesses and value chain development also face numerous challenges, among which are scaling up the viability of products and services, securing financing, and gaining the trust of low-income consumers. To overcome these challenges and maximize South Africa’s opportunities, inclusive businesses can rely on certain enablers that tend to be created and provided by actors from other sectors: government and the public sector, civil society, and academia. These actors can assist inclusive businesses in various activities, including communicating about and marketing products for income; providing resources to lowincome entrepreneurs to enable them to become integrated into higher value chains; and capacity building. The future of renewable energy in South Africa will, among others, involve technology development, environmental impact reduction, and market infrastructure improvement.

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Recent experiences on coping with the fall-out from the COVID19 pandemic have amply highlighted the challenges emerging from the digital divide. The digital age presents South Africa with new opportunities to achieve economic and social inclusion. However, harnessing these new digital opportunities for growth, jobs, and inclusion will require addressing the current digital divide that risks leaving many South Africans behind. The ultimate goal of any strategy to bridge the digital divide should go beyond access and focus more on increased usage and impact. However, harnessing these digital opportunities will require coordinated effort, not only across government but also acting in unison with the private sector and civil society to select and implement a digital pathway for the country that leaves no one behind. The pathway will involve progressive and affirmative change in business models that price products and services. Although South African policymakers have employed the language of social compact in the context of COVID-19, the narrow framing does not tackle the multi-dimensional risks and areas of fragility that are being compounded by the pandemic, nor engage with the diversity of needs, everyday experiences, and vulnerabilities of South Africans. The crisis has revealed fragilities in South Africa’s formalized yet “unsettled” political settlement—which, over two and a half decades, has not sufficiently addressed the structural legacies to achieve the anticipated inclusive outcomes. A more inclusive settlement requires determined action to transform well-known competing policy imperatives (at the heart of which, broadly, are economic growth and redistribution), as well as continuing propensities and avenues for state capture and corruption. More resilient and accountable institutions and effective coordination across government cannot be fashioned overnight, particularly in a crisis. Devising a coherent strategy for building back better nonetheless demands greater cohesion and capacity development across government (including making meritbased appointments), serious investment in improving data collection and analysis, and applying the data critically, at different levels of government. It also demands a robust commitment to transparency, and more concerted, genuine, and participatory societal engagement in deliberating about South Africa’s democratic path. Despite South Africa’s myriad social cohesion policy efforts, the driver of a resilient social contract will unlikely grow until inclusive development outcomes, which are at the heart of a more socially integrated society,

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become more apparent. The ongoing assessment and development of a new national social cohesion strategy is under way and is confronting this challenge. This strategy, nonetheless, needs to give greater recognition to poverty and inequality as key obstacles to social cohesion. Stronger social cohesion also requires greater trust in government and vis-à-vis other groups and citizens in society, as well as a sense of belonging and inclusion. Critically, the country’s security sector demands attention and transformation, especially in respect of reducing public mistrust in the police and tackling corruption.

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Index

A accountable institutions, 314 a flatter Phillips curve, 109 Alibaba Rural Support Programme, 284 Anglo-Boer War, 14

B Bill of Rights, 157 Black October, 14 budget deficit, 107 Building back better, 315

C capital, 4, 5, 23, 25, 33, 37, 49, 53, 56–58, 67, 69, 75, 79, 85–87, 90, 96, 181, 183, 185, 188, 189, 192, 194, 195, 199, 200, 202, 224, 228, 243, 244, 257, 313 capitalize on the Covid-19, 13 COGTA, 63 Colour Bar Act of 1926, 14 Companies Act, 196

Compensation Fund (CF), 153 Conditionalities, 96 conventional monetary policy, 113 corruption, 313 Countercyclical Capital Buffer, 113 COVID-19, 97, 309 COVID-19 pandemic, 103 COVID-19 response strategy, 311 critical junctures, 43 D data, 13, 67, 78, 130–132, 135, 141, 146, 147, 214, 236, 241, 242, 257, 263, 276, 280, 282, 285–287, 303, 304, 307, 314 debt crises, 3 debt-to-GDP ratio, 111 decline in exports, 29 developmental assistance, 3 development finance institutions, 177 digital changes in society, 8 digital divide, 290 digital natives, 283 digital policy environment, 67

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Qobo et al. (eds.), The Future of the South African Political Economy Post-COVID 19, International Political Economy Series, https://doi.org/10.1007/978-3-031-10576-0

377

378

INDEX

diversity, 254, 264, 313 dynamic state capabilities, 180

E economic activity, 3 economic depression, 11 economic governance, 91 economic growth, 5, 26, 48, 51, 57, 69, 79, 181, 186, 188, 190, 194, 198, 199, 204, 214, 219, 224, 225, 265, 278, 284, 299, 312, 313 economic recovery, 179 Eskom, 8, 24, 35, 55, 180, 182, 185, 186, 211, 214, 216, 217, 221, 224–226, 229, 230, 237, 239, 242, 248 existing infrastructure, 5

F financial resources, 18 fiscal, 2–5, 13, 21–23, 27, 28, 35–38, 79, 178, 202–204, 225, 226, 262, 274, 290, 298 fiscal multipliers, 108 fiscal sustainability, 7, 105 future of employment, 2

G global institutions, 298 grant, 3 Great Depression, 20

H hard lockdown measures, 3 health, 11 health pandemics, 11 1920 Housing Act, 16

I Industrial Conciliation Act of 1924, 14 industrial policy, 80, 89 inequality, 58, 76, 147, 159, 189, 212, 215, 218, 235, 238, 248, 274, 278, 281, 285, 298, 300, 308, 310, 312, 314 International Economic Crisis, 36

J Just Energy Transition, 212

K Khula Enterprise Finance (KEF), 192

L labor market, 2, 36, 89, 129–139, 141, 143, 145, 146, 147, 149, 212 linear probability models, 141 liquidity coverage ratio, 113 Lockdown regulations, 306 low frequency, 68 LTE devices, 280

M macroeconomic, 26, 52, 85, 86, 89, 202, 213, 231, 278 macro-economic stability, 7, 105 Mazzucato, M., 96 Mines and Works Act of 1926, 14 mobile broadband, 278 monetary and fiscal policy, 7, 104 Monetary Policy Committee, 107 multilateralism, 298 Municipal Finance Management Act, 196

INDEX

N National Centre for Infectious Diseases (NCID, 19 National Climate Change Adaption Strategy, 218 National Coordinating Command Council (NCCC), 307 National Credit Act (NCA), 113 National Development Plan, 178 National Economic Development and Labour Council (NEDLAC), 307 National Empowerment Fund (NEF), 193 National Infrastructure Plan, 279 national lockdown policy, 134, 147 national regulatory systems, 26 National Urban Reconstruction and Housing Agency (Nurcha), 192 Nelson Mandela Annual Lecture, 298 nominal demand shock, 109

O on bond purchases, 114

P Phillips curve, 109 policy measures, 2 poll tax, 15 Poor White Problem, 14 premature deindustrialization, 80, 97 primary production, 24 protection measures, 7 Protests, 301 provincial and national government, 34 public spending, 7

Q Quantitative Easing, 113

379

Quarterly Labour Force Survey (QLFS), 131 R racial injustice, 309 rainbow nation, 302 Rand Revolt in 1922, 15 Reconstruction phase, 5 regional value chains, 8 renewable energy, 8, 195, 199, 213, 218–221, 224–227, 229, 235–237, 240–250, 253–257, 262–265 resilient social contracts, 300 Rising inflation, 15 Rural Housing Loan Fund (RHLF), 192 S SARB asset purchases program, 115 SARS-COV-2 virus, 152 service delivery to communities, 61 Severe Acute Respiratory Syndrome (SARS), 12 Singapore, 18 SMMEs, 116 Smoot-Hawley Tariff Act of 1930, 20 social cohesion, 314 social contracts, 9, 298 social grants, 112 social security, 7, 156 Social security systems, 151 Social Welfare, 16 South African Mutual Life Assurance Society, 16 South African Social Security Agency (SASSA), 153 South Korea, 309 stagnant, 311 state capacity, 95 state interventions, 15

380

INDEX

State-Owned Assets Supervision and Administration Commission (SASAC), 198 state-owned enterprises, 7, 177 state provision, 17 stock markets, 26 structural transformation, 79, 97 sub-Saharan Africa, 308 supply-side shocks, 110 support building back better, 299 Sustainable Development Goals, 299 T targeted long-term refinancing operations, 119 Taylor Committee, 154 The Competition Commission’s Data Services Market Inquiry, 282 The Future Economy Project, 2 The National Housing Finance Corporation (NHFC), 192

The National Treasury, 116 The SA Micro-Finance Apex Fund (SAMAF), 193 The Spanish Flu, 12

U underdeveloped, 90 Unemployment Insurance Fund (UIF), 153 unemployment rate, 3

W women, 16, 130, 137, 141, 178, 193, 203, 307 World War I, 13

Z Zondo Commission testimonies, 48