A new Bureau for Economic Research report indicated that South Africa needs more economic policies to address poverty, unemployment, and inequality.
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South Africa needs stronger economic growth and more focused policy interventions to make meaningful progress in reducing poverty, unemployment and inequality, according to a new report by the Bureau for Economic Research (BER).
The report examines a recent working paper by Stellenbosch University economist, Professor Servaas van der Berg, which argues that sustained economic growth can have a greater impact on poverty reduction than efforts aimed solely at lowering inequality.
Dr. Roy Havemann, an economist at the BER, said poverty, unemployment and inequality remain South Africa’s three most pressing socio-economic challenges.
He noted that Van der Berg, one of the country’s leading development economists, concludes in his paper on poverty reduction that even moderate levels of economic growth can significantly reduce poverty over time.
According to Havemann, structural characteristics of South Africa’s labour market continue to entrench inequality. These include persistently high unemployment, strong wage premiums for higher levels of education and enduring wage disparities across sectors.
“Inequality is so baked into the structure of the South African economy that Van der Berg finds that even a six-point drop in South Africa's Gini coefficient would do less for poverty reduction over the next 15 years than sustained, moderate real economic growth,” he said.
The report also highlights the importance of the Tinbergen principle, developed by Dutch economist and Nobel Prize winner Jan Tinbergen. The principle argues that each policy instrument should be designed to achieve a single objective.
Havemann said attempts to use one policy to achieve multiple goals often lead to ineffective outcomes and policy confusion.
He pointed to South Africa’s preferential procurement system as an example. The system seeks to achieve both cost-effective procurement for government and broader socio-economic objectives, such as empowerment and transformation.
“Using policies to achieve multiple (and sometimes conflicting) ends is a recipe for a policy muddle. By trying to do too much, you end up not doing very much at all,” he said.
Historically, the framework allocated 80 points to price and 20 points to empowerment and social goals. While the system is currently undergoing legal and regulatory changes, Havemann argued that it effectively allows suppliers with stronger empowerment credentials to charge higher prices for goods and services sold to the state.
“The outcome is that the more empowered you are, the higher the price you can charge for goods sold to the state,” Havemann said.
This additional cost has been described by National Treasury as a “procurement premium”.
The rationale behind the premium is that it promotes black entrepreneurship and helps reduce inequality. However, Havemann argued that the additional spending must ultimately be financed through taxation.
He noted that value-added tax (VAT), one of the state’s largest sources of revenue, is paid by all South Africans. At the same time, the demographic profile of personal income taxpayers is becoming increasingly diverse, while corporate tax is also increasingly collected from transformed businesses.
Havemann said that the procurement premium is thus being paid by all South Africans, but it flows through only to those that have tenders with the state.
“The Democratic Alliance recently proposed a same-same approach. Their system also relies on a procurement premium, but the premium goes to firms that contribute to the Sustainable Development Goals,” he said.
“This sounds wonderful but is quite vague and more difficult to audit than the BEE system. Imagine your auditors at the financial year-end asking for audit evidence on how you’ve improved human development in the world.”
Havemann added that the Constitution requires that government procurement be “fair, equitable, transparent, competitive and cost-effective.”
“And while it does allow for preferential procurement, the policy question remains: are these additional rules worth the cost? Politics is all about choices,” he said.
“No single policy can solve all problems at once. That said, the evidence shows that faster economic growth can make a meaningful dent in South Africa’s three main challenges over the longer term.”
Havemann concluded that more growth means more jobs and more money for the fiscus. This will help increase spending on things like education and healthcare and social grants, which will lower poverty and, ultimately, inequality.
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