World Bank has simple answer to improve South Africa’s economic growth

The World Bank says South Africa is on a wrong growth trajectory despite its long-recognised strengths, with real GDP per capita that was less in 2023 than in 2007, and unemployment of more than 30%, one of the highest rates in the world, as well as high and persistent inequality.

How does South Africa get back on track for economic growth? The World Bank has a simple answer: end the country’s excessive regulatory burden and review its black-ownership laws to remove the “signs of paralysis” that keeps investors away.

According to a new World Bank report, Driving Inclusive Growth in South Africa: Quick Wins with Competitive Markets and Efficient Institutions, South Africa has struggled to expand its economy, growing by only 0.7% per year, which is four times slower than other middle-income countries, over the past decade.

“Economic opportunities also remained deeply unequal, with two-thirds of South Africans living in poverty and 40% of adults, primarily young people and women, either unemployed or discouraged from looking for a job. This figure represents the world’s highest unemployment rate,” the World Bank says in the report.

ALSO READ: World Bank suggests trade policy reforms for SA – report

South Africa’s strengths according to the World Bank

The World Bank says South Africa’s strengths include:

• It is the second-largest economy in Africa after Nigeria and the 32nd-largest in the world
• A large and diversified economy with mining, high-productivity agriculture, manufacturing including automotive, high-productivity agro-processing and services, including a well-developed financial sector and strong tourism potential
• The biggest regional transport and logistics hub in Sub-Saharan Africa and 40th of 165 countries in the World Bank Group liner-shipping connectivity index
• Active corporate investors on foreign markets, representing three-quarters of 2015–19 foreign direct investment outflows from Sub-Saharan Africa
• Research and development capacity with the top three universities on the continent and critical mass of highly qualified labour
• Two-thirds of the population (about 40 million people) living in cities with potential agglomeration effects
• A large middle-income class with around 40% of people earning between $4 and $13 a day.

ALSO READ: World Bank: 2% growth won’t ease SA’s poverty, unemployment

Getting rid of burden of excessive institutions

South Africa must transform its economy to achieve robust and inclusive growth by tackling two major shortcomings in its economic model, by firstly strengthening and broadening market competition and secondly by making institutions more efficient and supportive, the World Bank says in the report.

The burden of institutions has become excessive, the World Bank says. Not only for businesses and citizens but also for public administration.

“South African policymakers attempted, often with good intentions, to correct market or historical failures by intervening through hard regulations, such as black empowerment policies, local content and collective labour bargaining and direct support programmes to specific groups, such as grants, tax rebates and labour training.

ALSO READ: No significant economic growth expected for SA over next three years

“Today, these interventions have become so cumbersome that they smother the implementation capacity of the public administration, especially local officials and open spaces for corruption.”

The report points out that state capture left an enduring mark on South Africa’s institutions through dismantling accountability mechanisms and losing skilled personnel in key entities, weakening their capacity to deliver public goods and services.

Telecommunications and aviation

However, the World Bank says South Africa should consider these scenarios:

• to bring phones and IT technologies to its population, government introduced competition to the telecommunication market in the early 2000s, making South African one of the middle-income countries with the highest rates of digital penetration and exports. In parallel, the private sector also benefited. MTN is now doing business in 22 countries around the world.
• The same approach was used for aviation, with the emergence of several regional private companies and more recently in power generation, where competition has led to an unprecedented increase in renewable energy over the past 18 months. There is no obvious reason such an approach, when coupled with smart regulations, cannot be applied to other sectors, the World Bank says.

According to the report South Africa can achieve a robust economic recovery shared across all sectors of society in the immediate future by implementing a series of policy actions in four priority areas:

• infrastructure services
• greater private sector participation
• creating cities as engines of growth and
• efficient public spending.

ALSO READ: Decline in GDP unexpected and disappointing – economists

Recovery of economy can create millions of jobs

The World Bank says this recovery, in turn, has the potential to create the millions of jobs that South Africans need to improve their lives, exit poverty and contribute to the economy. The report also points out that economic opportunities in the country remain deeply unequal.

“The report highlights that targeted policy actions to foster competitive markets and strengthen institutions can spur recovery and lay the foundation for sustainable growth and shared prosperity in South Africa,” Axel van Trotsenburg, senior managing director of the World Bank, says.

“The report is the result of extensive engagement with experts and stakeholders to identify concrete policy options for improving the lives of millions of South Africans. It will also help inform how the World Bank can best support the country through technical assistance and lending programmes.”

ALSO READ: SA needs trillions to achieve infrastructure goals, says Ramaphosa

Therefore, the report offers pragmatic and specific policy actions tailored for South Africa’s unique context to kick off the transformation process and create momentum for reforms.

“The report provides a clear roadmap for South Africa to unlock its economic potential. By fostering competition and enhancing institutional efficiency, we can create opportunities that drive inclusive growth and improve livelihoods across the country,” Satu Kahkonen, the World Bank’s country director for South Africa, says.

World Bank’s plan for South Africa

The plan for South Africa fleshed out in the report includes delivering high-quality and affordable infrastructure services to reduce existing constraints on businesses and increase households’ disposable income.

The plan also encourages measures to foster private sector growth to promote innovation and competitiveness which will enhance job creation. By making cities engines of inclusive growth, the country can shrink economic distances and provide opportunities for all.

The report also highlights the need to improve the efficiency of public spending to increase the value for money of government interventions in the economy.

ALSO READ: IMF welcomes SA’s reform efforts but says more is needed

Finance Minister Enoch Godongwana says we have clear evidence of the tangible outcomes of reforms that reduce economic bottlenecks. “This is best exemplified by the first phase of Operation Vulindlela. One of its key interventions was reforms to regulation that deepened competition in sectors like electricity, rail and telecoms.

“The next phase will go even further and aim to accelerate reforms in key network industries. We are delighted to have the benefit of this new report to broaden our approach to inclusive growth.”

Quick wins can bring quick results

The report identifies quick wins for each priority, selected for their technical feasibility, minimal political constraints, potential for significant impact and timely implementation. This menu reflects inputs from a group of international experts led by Nobel laureate in Economic Sciences Michael Spence and representatives of South Africa’s government, private sector, academia, and civil society.

The World Bank says South Africa must reinvigorate its economic model to get onto a robust and inclusive growth path and meet the expectations from its citizens. “This does not need a revolution in its policymaking but evolution to continue addressing the limited competition in many of the country’s strategic sectors.

“This evolution also requires addressing the growing inefficiency in the country’s institutions, which has worsened over time due to the increasing complexity of government interventions, significant state capture and resulting high levels of corruption.”