The World Bank has again urged South Africa to consider “reorienting” certain investment tax incentives towards more labour-intensive sectors such as construction, manufacturing, agriculture and trade to encourage private investment and bolster job creation in the muted growth environment.
This emerged during the Department of Trade and Industry’s (DTI’s) Economic Policy Dialogue on South Africa’s economic outlook for 2017, which provides a platform for stakeholders to provide input to influence policy decisions within the DTI.
It also aimed to provide a better understanding of the opportunities and threats facing the South African economy and how policymakers should navigate these challenges.
A detailed report on the yearly dialogue and its key outcomes will be tabled with the DTI’s Economic Research Policy Coordination management for review.
Addressing delegates, World Bank senior economist Dr Marek Hanusch said the country’s estimated 0.4% gross domestic product (GDP) growth during 2016 marked a third year of decelerated growth.
Putting forth suggestions to policymakers for consideration, he noted that, while a more optimistic acceleration in GDP growth in 2017 and 2018 was expected, to a respective 1.1% and 1.8%, this remained lower than targeted, with investment levels, dampened by policy uncertainty, slowing trade and several other variables, expected to remain at their lowest over the next few years, which would challenge development and growth ambitions.
“Reorienting investment tax incentives towards sectors of South Africa’s economy that have high productivity and a comparative advantage would stimulate growth, create additional jobs and support poverty alleviation – encouraging private investment is one area where policy can help to decisively turn the South African economy around and enhance growth,” he explained.
Industrial policy to encourage investment and boost job creation through tax incentives was therefore required, he said, noting that growth, while necessary, was not enough; there was also a need for such policy to unlock benefits for the poor.
“The current capital allocations and investment tax incentives have not yielded a significant reallocation of private capital toward industrial sectors, nor produced higher industrial employment,” Hanusch explained.
“Providing an enabling environment for private investment is a key [policy] priority.”
He explained that, in recent years, private investment had actually been targeted toward “less productive” sectors, including mining and electricity, which reduced average capital productivity.
Further, Hanusch reasserted his views on clamping down on cartels and strengthening the competition frameworks in South Africa, as price-fixing and collusive behaviour directly impacted on growth, poverty and inequality in a number of ways.
The World Bank recommended South Africa leverage its competition policies, with Hanusch outlining that the country needed to enhance its global competitiveness, lower input costs, increase output, lower consumer prices and raise consumption and savings to do so.
Increased competition between firms would unlock lower prices, increase output and lead to higher-quality products in an effort to win market share.
This was particularly important for the downstream industries benefiting from the lower input costs.
Between 2005 and 2015, South Africa’s competition authorities had shed light on the activities of some 76 cartels.
However, Hanusch cited international evidence showing that detected cases only represented 10% to 40% of all cartels.
“We find that cartels occur more frequently where markets are dominated by a few firms, where barriers to entry are high and where there is excess capacity,” he noted.
While the growth-enhancing effects are clear, tackling cartels also has a direct benefit for consumers, with the World Bank citing four cleared-up cartel cases in the pharmaceuticals, poultry, maize and wheat sectors – the products of the four industries made up some 15.6% of the consumption basket of the population’s poorest 10% – lifting some 202 000 people above the poverty line.
The sanctioning of the cartel activity had generated a 0.4 percentage point reduction in the overall national poverty rate, lifted the purchasing power of the poor by 1.6% and had delivered 3.4 times more savings for the bottom 40% of the population than for the top 40%, with the lower retail prices helping cash grants for the poor to stretch further.