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Towards an Economic Strategy for SA - National Treasury

Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa Prepared by Economic Policy, National Treasury Abstract: The combination of low growth and rising unemployment means that South Africa's Economic trajectory is unsustainable. Government should implement a series of growth reforms that promote Economic transformation, support labour-intensive growth, and create a globally competitive economy. We start by highlighting five fundamental building blocks of sustainable long-run growth and then identify a series of specific and detailed reforms to raise potential growth. These growth reforms are organized according to the following themes: (i) modernizing network industries; (ii) lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth; (iii) prioritizing labour-intensive growth in sectors such as agriculture and services, including tourism; (iv) implementing focused and flexible industrial and trade policy; and (v) promoting export competitiveness and harnessing regional growth opportunities.

economic regulation component should be independent of line departments and directly funded from industry levies, as per international best practice. The state should leverage private-sector expertise in broadband roll-out, rather than relying exclusively on state-owned companies (SOCs).

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Transcription of Towards an Economic Strategy for SA - National Treasury

1 Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa Prepared by Economic Policy, National Treasury Abstract: The combination of low growth and rising unemployment means that South Africa's Economic trajectory is unsustainable. Government should implement a series of growth reforms that promote Economic transformation, support labour-intensive growth, and create a globally competitive economy. We start by highlighting five fundamental building blocks of sustainable long-run growth and then identify a series of specific and detailed reforms to raise potential growth. These growth reforms are organized according to the following themes: (i) modernizing network industries; (ii) lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth; (iii) prioritizing labour-intensive growth in sectors such as agriculture and services, including tourism; (iv) implementing focused and flexible industrial and trade policy; and (v) promoting export competitiveness and harnessing regional growth opportunities.

2 We estimate the economy-wide impact of the proposed interventions over time based on when they can realistically be implemented, and find they can raise potential growth by 2 3 percentage points and create over one million job opportunities. Contents Executive 3. i. Modernizing network industries to promote competitiveness and inclusive growth .. 3. ii. Lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth .. 5. iii. Prioritizing labour-intensive growth: agriculture and services .. 6. iv. Implementing focused and flexible industrial and trade policy to promote competitiveness and facilitate long-run 7. v. Promoting export competitiveness and harnessing regional growth opportunities .. 9. vi. Quantifying the impact of proposed growth reforms .. 9. 1 Introduction .. 11. 2 Modernizing network industries .. 18. Electricity: planning, pricing, and Eskom's sustainability.

3 19. Telecommunications: competition, spectrum allocation, and broadband 22. Transport: regulation, pricing, and competition .. 24. Water: infrastructure, regulation, and institutional models .. 26. 3 Lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth .. 27. Lower barriers to entry to address distorted patterns of ownership .. 28. Promote the growth of small, micro, and medium enterprises .. 31. Leverage the role of public 33. Reduce red tape .. 33. Broaden financing options .. 36. 4 Prioritizing labour-intensive growth: the role of agriculture and services .. 36. The role of agriculture in promoting labour-intensive growth .. 37. Innovative joint ventures can boost agricultural production and promote agrarian transformation .. 37. Create an enabling environment for investment in agriculture .. 39. Implement innovative financing solutions required by farmers.

4 39. Introduce adequate and affordable agriculture insurance .. 40. Improve extension services for smallholder and emerging farmers .. 40. Enhance trade promotion, market access, and access to water for irrigated agriculture .. 41. Invest in establishing innovative market linkages for smallholders .. 41. Harnessing a growing services sector to boost Economic transformation .. 42. The importance of growing tourism for inclusive growth and transformation .. 42. 5 Implementing focused and flexible industrial and trade policy .. 44. 6 Promoting export competitiveness and harnessing regional growth 50. 1. Implement cross-cutting interventions to boost the export competitiveness of firms 50. Leverage regional opportunities to promote export 52. Harness regional opportunities: transport, energy, and 53. 7 Quantifying the impact of proposed reforms .. 54. Short-term scenarios .. 54. Medium-term scenarios .. 55. Long-term scenarios.

5 58. Other considerations .. 59. Scenario results .. 59. References .. 62. 2. Executive summary South Africa's current Economic trajectory is unsustainable: Economic growth has stagnated, unemployment is rising, and inequality remains high. The government should urgently implement a series of reforms that can boost South Africa's growth in the short term, while also creating the conditions for higher long-term sustainable growth. These growth reforms should promote Economic transformation, support labour-intensive growth, and create a globally competitive economy. The specific and detailed reforms outlined here demonstrate that the only way to raise South Africa's potential growth is through the implementation of a series of deliberate and concerted actions across a range of fronts. However, any attempt to raise South Africa's potential growth rate must include progress on the fundamental building blocks of long-run sustainable growth.

6 These include: Improving educational outcomes throughout the educational life-cycle, with a particular focus on early childhood development (which presents the greatest return on educational investment) and enhancing the relevance of education systems by better aligning learning outcomes to labour market needs. Implementing youth employment interventions such as continued support for government programmes that incentivize job creation ( learnerships) and apprenticeships that facilitate school-to-work transition based on close cooperation between institutions of learning and the private sector. Expanding effective, affordable, and integrated public transport systems and prioritizing targeted housing and urban development interventions to overcome spatial legacies. The latter includes mechanisms to facilitate the growth of resale markets in social housing, fast-tracking the provision of title deeds to beneficiaries and leveraging private sector finance for low-income housing developments.

7 Addressing the skills constraint through a combination of short-term solutions (such as the easing of immigration regulations for individuals with tertiary qualifications from accredited institutions) and the long-term educational reforms discussed above. Delivering a capable state supported by a new compact between the government, private sector, and other social partners. Government's commitment to the compact should prioritize strengthening the capability of the public sector and state-owned entities as well as achieving the right balance between policy progress and certainty to ensure the economy is able to attract investment. The private sector's commitment must ensure that businesses seek government policies that are unambiguously in the public interest. A stable macroeconomic policy framework underpinned by a flexible exchange rate, inflation targeting, and credible and sustainable fiscal policy. Low and stable inflation and a more sustainable fiscal trajectory reduces uncertainty, lowers borrowing costs across the economy, anchors returns expectations for investments and increases business confidence all of which boost productivity.

8 Turning to the growth reform agenda, we draw on the National Development Plan to outline five themes and the contribution of growth reforms within each theme that prioritize Economic transformation, inclusive growth, and competitiveness. i. Modernizing network industries to promote competitiveness and inclusive growth 3. Network industries such as energy, transport, and telecommunications, provide essential services that underpin the growth, productivity, and competitiveness of an economy. South African network industries face some challenges including the absence of efficient Economic regulation, old and poorly maintained infrastructure, a lack of access to quality services, and poorly managed state-owned companies. To address these challenges, a number of interventions should be prioritized. Electricity: In energy planning, the base case of the Integrated Resource Plan (IRP). should be unconstrained so that all policy options can be compared relative to the least- cost option; the IRP should be updated regulary to reflect changes in Economic conditions and technology; future electricity tariffs should be managed in a transparent and predictable manner; and the over-reliance of municipal budgets on electricity revenue needs to be corrected.

9 An independent transmission company, to be created from the unbundling of Eskom, should buy electricity transparently from independent power producers. Consideration should be given to regulation that enables households and firms to sell excess electricity they generate. Telecommunications: Government should release spectrum through an auction with a small set-aside for a government-controlled network, and competition should be allowed in Telkom's infrastructure that connects the local exchange to residential homes and businesses. Rapid deployment guidelines that accelerate the installation of telecommunications infrastructure should be finalized, and open access conditions should be imposed to minimize unnecessary duplication of telecommunications infrastructure. The Independent Communications Authority of South Africa's (ICASA's) proposed Economic regulation component should be independent of line departments and directly funded from industry levies, as per international best practice.

10 The state should leverage private -sector expertise in broadband roll-out, rather than relying exclusively on state- owned companies (SOCs). Transport: We need to finalize the Economic Regulation of Transport Bill; enforce separate accounting divisions or separate financial statements for the various operating divisions of Transnet to ensure subsidies across divisions are made explicit; grant third- party access to the rail network to encourage private sector participation; and introduce competition in ports and rail. Other interventions that can improve freight transport include facilitating the exchange of information and improving coordination between shippers and transport companies, and encouraging the shift from road to rail where practical and efficient. Public transport can play a significant role in overcoming historical spatial planning through the integration of modes by local government and the densification of cities in specific areas.