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ANC economic transformation document

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5 March 2012. In South Africa, if you want to join in the discussion phase of policy decisions, you need to have your voice heard whilst the ANC is discussing the matter - by the time it is rubber-stamped in gets to parliament it's usually too late. Today the ANC released a discussion document on economic transformation. There were a bunch of questions at the end - here are my answers:

Why isn't BEE working?

The problem with BEE is that it looks at the symptom of the problem rather than its cause. If you want to know who's going to have the great jobs in South Africa in 20 years time, look no further than those matriculants who are excelling at mathematics, science & english. These kids have invested in themselves and their abilities, giving them a lifetime's edge over kids with inferior skills. Those kids with poor matric results are the ones who are going to struggle to get "decent employment".

Ultimately, on average, those who have better skills will create more value and be better rewarded than those with lesser skills. You see, the power of BEE pales in comparison to the power of education (and by education I especially include the need to give love and guidance to infants & toddlers up to the age of 7, the impressionable years). It's no coincidence that, as the discussion document mentions, "95% of the unemployed (in South Africa) do not have tertiary education".

Why is economic growth sometimes associated with increased income inequality?

It's more insightful to talk about SKILL INEQUALITY rather than income inequality. Once you understand that skilled people add far more value than unskilled people, you'll also understand that the root cause of income inequality is an inequality in skills. The children who win the birth-lottery are those with parents who give them time, love and guidance up to the impressionable age of 7; encourage and assist them in primary & high school, and help them to get a tertiary education - this leaves them with a lifetime advantage in terms of the skills they have relative to others.

How do developments in the global economy impact on our economic transformation programme?

It's tempting to look at the short-term issues which are largely out of our control, but I'm going to ignore those completely and focus on longer term issues which are in our control:

What are the benefits & risks of our open economy strategy?

Everything else being equal, in order to compete in an open economy we must either have lower wages or better skills. Let's look at the situation of the low skilled & the high skilled individuals seperately.

Low skilled individuals are structurally condemned to be unemployed

Our economy has masses of low skilled workers, who strike more often than other countries, and where union pressure keeps wages high. In the open economy we are competing against low skilled workers in other countries, who strike less and are paid less.

So, the main problem with our setup is that it structurally condemns low skilled workers in South Africa to be largely unemployed, as they are outcompeted by low skilled workers in other countries.

High skilled workers

By contrast, the high skilled workers in South Africa earn less than similarly high skilled employees in in some countries, but more than those in others. I suspect high skilled workers in South Africa earn average wages by world standards, which allows them to compete in a lot of areas.

Benefits of the open economy

South Africa doesn't produce a lot of goods itself, so an open economy allows South Africa to import the advanced goods it needs (and to pay for it largely by exporting its mineral resources). Without these advanced goods, the standard of living would be far lower in South Africa.

How much potential is there in an African Agenda?

It's likely opening up trade with the rest of Africa will work well, as there isn't as big a skill differential between South Africa & the rest of Africa; and companies there face similar headwinds to South African companies (so the playing field is more level).

How can job creation be accelerated?

Focus on the underlying cause of the lack of jobs, which is the lack of skill. Try reduce rates of strikes to increase productivity. Be more open to lower wages, and allowing companies to easily hire and fire.

Tax policy

I feel like we're missing a trick in terms of structuring our tax policy to encourage employment. Increase the company tax rate to 35%, and use that extra income to allow companies to subtract 1.5 times their labour bill (up to a maximum amount per employee) as an expense (rather than just 1 times); to encourage more employment.

Impact on jobs taken into account in all decisision

Any decision made by government should take into account the impact on job creation. If the decision would have an adverse impact on jobs, the decision should be escalated to the President. An example of this is the Department of Home Affairs decision to not allow cruises from Cape Town to dock at the V&A Waterfront, because of security considerations - this downgrades the appeal of the cruises, with a negative impact on job creation.

Exports of beneficiated products should be strongly encouraged, by as far as possible not charging any taxes on exported items, or on the profit generated by them. In other words the benefit for exported items is jobs, not tax.

Should manufacturing/services or public works be the engine of job creation?

It doesn't matter which sector, so long as we get the jobs. The one area we need to be smart in, is the use of limited mineral resources, as these only provide jobs until the minerals have been depleted - it's therefore important to encourage the beneficiation of these minerals.

Improving education

It's key to have a measure of whether you're achieving your goals. What I'd suggest is to take part in the "Trends in International Mathematics & Science Study", which measures how Grade 4's and Grade 8's are doing. For some reason SA didn't take part in 2003 and 2007, but in the 1999 study South Africa came last (out of 38 countries) in both mathematics and science - this explains a lot.

Focus on the first 7 years

As a parent, it's my contention that you can have the biggest impact on somebody's life in the first 7 years of their childhood. I don't know what the solutions or even all the problems are in this area, but I believe that if children are given sufficient love and nurturing in their first 7 years, a lot of South Africa's problems will eventually resolve themselves.

Improving road infrastructure

"It is estimated that 58% of South African roads are gravel, and 70% of existing roads require urgent repair. Improving the quality of roads is important to lower the costs of living and production in rural areas, improves access to basic services, especially public transport." Hopefully my Afrimat shares will benefit from supplying some of the aggregate for building the roads and upgrading the rail network :)

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