Leveraging firms

South Africa, everyone agrees, has a growth problem. The country has performed poorly when compared with its middle- income peers for more than a decade, averaging growth of only 1.1%.

There is also broad agreement that, at these levels, South Africa is unable to generate the jobs required to make any inroads into its poverty crisis, let alone begin tackling its extreme levels of inequality.

There is much consensus, too, on how South Africa should go about breaking free from its current low-growth trap. It must address those issues that are constraining growth across the economy by ending loadshedding, reducing the cost of logistics and digital services, tackling bureaucratic blockages in areas such as the provision of mining and water-use licences, dealing with serious service delivery problems across local government, improving educational outcomes and getting a grip on crime.

Given the country’s miserable societal deficits, there is also an acceptance (admittedly grudging in some circles) that social welfare is needed to support those who have little chance of securing a sustainable livelihood, as well as the country’s children and the elderly.

In many ways, however, social assistance has become the only strategy to deal with poverty and its effectiveness and sustainability depends on continued growth, which is so weak that it is lagging population growth. This means that the country’s initial postdemocracy advances in tackling poverty have stalled.

Research by Professor Haroon Bhorat of the Development Policy Research Unit at the University of Cape Town’s School of Economics shows that South Africa spends 3.3% of GDP on social assistance, making it the tenth-highest spender globally and ahead of Argentina (2.1%), Mexico (1.7%), India (1.5%), Brazil (1.4%), China (0.8%).

While this poverty-reduction instrument remains crucial, Bhorat says social assistance cannot be viewed as part of a sustainable growth and employment strategy. Hence, he is suggesting that policymakers also consider supporting and incentivising firms in addition to households, describing such a possible shift as ‘supply-side economics of a good type’.

The idea is to unleash the potential of all manner of firms, including the very smallest of firms, to grow and generate jobs. Admittedly this is complex as different types of firms require quite different kinds of support. A small vendor, for instance, would benefit more immediately from moves to create safe spaces to trade and safe places to store goods after hours than initiatives, say, to improve port or rail efficiency, which offer more indirect benefits, but which are crucial for larger companies.

Therefore, Bhorat argues that support would have to be size-based and directed to be effective. It would also necessarily involve a rethinking of the approach to the informal sector, which currently is estimated to absorb only 16% of South African workers, compared with an average 45% share in most other middle-income countries.

South Africa, he says, already showed some success in applying such a supply-side intervention when it used the Temporary Employer/Employee Relief Scheme to support jobs at risk during Covid, which he calculates saved 2.7-million jobs.