Why South Africa needs a Transformation Fund for economic justice
Funds remain a necessary catalyst to economic reconstruction and development
Dr Nthabiseng Moleko
In the most unequal society in the world, where the majority of the population is economically inactive and chronically unemployed, surely the need for economic expansion and broadening economic participation of those excluded has to take centre stage?
The legacy of racial classifications that determined one’s access to economic opportunities entrenched an unjust framework that numerous programs and Acts post-democracy have attempted to reverse, with little results.
Dismantling systematic economic exclusion requires legal instruments that advance equity and justice. These legislative reforms included the Labour Relations Act of 1995 (LRA), the Basic Conditions of Employment Act of 1997 (BCEA), the Employment Equity Act of 1998 (EEA) and the Black Economic Empowerment Act of 2003.
These Acts sought to bring redress and reinstate the rights and dignity of workers and people of colour, particularly black South Africans who had suffered structural exclusion due to racial segregation and the normalisation of racist practices in the workplace and economy. This structural exclusion produced financial and labour market inequalities that persist, today. All these Acts were responding to the structural inequalities. Yet, it is important to note that they were heavily opposed despite the history of institutionalised racism.
South Africa is a nation that grapples with the aftermath of discriminatory systems that excluded the majority. Are present instruments sufficiently addressing the structural inequalities produced by job reservation for ‘whites only’? Are they rectifying the enterprise development that was for ‘whites only’, where Africans could only invest in taverns and liquor outlets but were barred from entering the productive and agricultural sectors of the economy? Under apartheid, legislation covered the whole country and ensured the unjust reforms had maximum impact.
South Africa, therefore, requires instruments that equally respond in scale to broaden economic participation and to put right apartheid’s laws that ensured Black South Africans occupied and remained in the economic wilderness and decay.
Three decades of economic policies, growth agendas, and economic strategies have liberalised the economy and promoted a business-friendly environment but have not improved the condition of those trapped in poverty and economic exclusion.
The current low growth trap continues to be revised downwards by the National Treasury to the current 1.1%, the unsustainable unemployment levels at 41.9%, on the back of a cost of living crisis for the majority of households point to the need for redistribution and transformation as a necessary condition for economic growth.
One of the legacies of apartheid is exclusion, reinforced by a financial ecosystem. It has not responded to the curated legacy of the inability of small, medium and micro enterprises (SMMEs)to access capital, nor has it systematically invested in them. Although we have seen increased firms and beneficiaries from the sector codes and Education for Sustainable Development programs. It is not sufficiently yielding the impact and transforming the markets because of scale and impact.
Broad-Based Black Economic Empowerment (B-BBEE) codes and sectoral targets attempted redress at a sectoral level; there have been some gains, but most targets have not been met, and by now, due to no serious punitive in place, if non-compliance occurs, firms can continue with business as usual.
The B-BBEE Commission is underfunded and requires institutional capacity to oversee the entirety of the economy, and it should be given the muscle to respond to non-compliance.
Entrepreneurs cannot begin without capital and market access. Investment in these firms is mandatory to remedy historic exclusion. Therefore, scaling up interventions and investing in areas trapped in economic ‘wilderness’ requires deliberate state-led interventions.
After WWII, European economies, infrastructure, morale, norms, and way of life were decimated. The Marshall Plan was established and funded through the formation of the International Monetary Fund (IMF) and World Bank.
After WWII, to shape the global financial order, a deal was reached amongst the Treasury heads, John Keynes (representing the UK) and Harry Dexter White (US), and several other nations to establish the International Bank for Reconstruction and Development (IBRD), later known as the World Bank and the IMF, to help redress the dire situation in Europe. These two banks had specific functions; the IMF provided short-term loans to countries struggling to pay their debts.
The IMF also was tasked with fixed exchange rates (tying the value of country currency to US dollar which was pegged to gold, to establish stability for currencies and encourage world trade). The global community realised that without providing resources and liquidity for countries needing reconstruction, nations would not recover without access to foreign credit investment and there would be minimal reformation.
Post-apartheid South Africa economic models have not yielded widespread gains as they do not address the issue of coverage; limiting widespread reform. To respond to the declining private credit sector credit extension during COVID-19, the state intervened with a R200 billion credit loan guarantee scheme in 2020.
Financial intermediaries disbursed a paltry R18.2bn, less than 10% of the allocated relief and less than a third of the applicants’ loans were approved by banks due to the stringent requirements of surety, collateral and limited access to markets. This resulted in an 11% decline in the number of SMMEs post COVID-19. More than 290 000 business enterprises closed down, with 1.5 million jobs lost during the third quarter of 2019 to third quarter of 2020 period. By the end of COVID-19 the share of black ownership of SMMEs declined substantially.
Is it not the appropriate time for the economic cluster to revisit the economic strategy and advance measures that improve economic opportunities for historically disadvantaged groups? Is it not time for the current economic cluster to address the current shortcomings of the financial ecosystem, and ensure new economic entrants have access to economic opportunities through access to finance and credit? Is it not time that an instrument led by the state in partnership with the private sector invests sufficient resources to reconstruct the desolation of many generations? I believe the transformation fund is an instrument that will deal decisively with access to finance and credit at scale and address credit requirements that inhibit many SMMEs’ access to finance.
The mainstream supply chains in a small, open market economy that has fierce competition from imported goods due to our inclusion in the global value chain means that additional measures to promote local businesses and entrepreneurs should be actively put in place.
Existing mechanisms have not changed economic systems to incorporate new entrants. This is why mechanisms that address inefficiencies and structural constraints in the economy should be supported if they encourage broad-based inclusion of businesses and, in particular, deal with barriers to entry in mainstream supply chains.
An empowerment model that will ensure redistribution must focus on township and rural enterprises whilst ensuring market access and deconcentrating economic hubs by connecting local businesses to supply inputs. This can only be done if the state uses the state procurement and all its economic instruments to enable new entrants and business owners an opportunity to not only expand but establish new and sustainable businesses.
Interventions to support the consolidation of funds and address fragmentation, interventions that provide new ideas on promoting financial inclusion to black-owned enterprises, and, most importantly, instruments that enhance market access and offer the opportunity to target broad economic participation meaningfully, are constitutional obligations.
If we are to change the society we are in and the economic outcome, we cannot keep doing the same thing repeatedly whilst we oppose mechanisms that hold the possibility of promoting economic inclusion that will stimulate growth and develop underdeveloped areas. Any instrument that addresses structural barriers to economic inclusion must be afforded an opportunity for implementation.
The reason is that what we have historically implemented has not brought about the equality and empowerment envisaged. We have not seen the redress and economic growth required for all South Africans to live in prosperity and abundance, as most people are excluded from economic participation.
For this reason, the Transformation Fund is possibly the solution to the economic crisis that has faced this nation since the 1950 Group Areas Act when implemented collaboratively with governance structures that ensure transparency and accountability across all parties, both public and private sector. It was done for the Solidarity Fund to respond to the crisis of COVID-19, we have an economic crisis on our hands, surely it can be done again.
Dr Nthabiseng Moleko is a Development Economist at the Stellenbosch Business School.
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