Priority 4 Injecting dynamism into the private sector SOUTH AFRICA POLICY PACKAGE © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and any other information shown on any map in this work do not imply, on the part of the World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 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Priority 4 Injecting dynamism into the private sector SOUTH AFRICA POLICY PACKAGE Contents Determine what is stifling private sector growth and unleash its potential 1 South Africa’s story of low productivity and the imposing presence of the state 1 South Africa’s productivity losses are costly 2 Low competition, low productivity 3 Excessive government intervention reinforces private sector inertia 4 growth firms, with a focus on two priority areas Unleashing the potential of high-­ 6 Priority area 1: Fostering competitiveness in industries of the future 8 Action 1: Upgrade the competition framework 8 Action 2: Facilitate foreign direct investment 8 Action 3: Harness the growth of digital finance 10 Action 4: Build a platform for developing a green economy using catalytic market instruments 10 Priority area 2: Upgrading the capabilities of high-­ growth small and medium enterprises 11 Action 5: Facilitate access to finance for small and medium enterprises 12 Action 6: Upgrade workers’ and managers’ skills 13 income earners Action 7: Incentivize labor search and mobility for low-­ 13 Notes 16 Box 1 South Africa’s strong potential in the battery market 12 Figures 1 South Africa is on the wrong side of productivity growth, 2011–2022 2 2 The gap in labor productivity between South Africa and the world is widening in all sectors, 2001–2017 2 3 Drastic declines in labor productivity in South Africa relative to peers 3 4 South Africa has lost its development edge compared with Malaysia, 1990–2019 3 5 Entry and exit of firms, 2021 3 6 Foreign direct investment lags that in peer economies, 2011–19 4 7 The top-­10 constraints reported by South African and Sub-­ Saharan African firms, 2020 5 8 A majority of South African state enterprises operate in competitive sectors of the domestic economy, and they operate across an unusually wide range of sectors 6 9 A guiding framework for prioritizing policies to enhance the development of high-­ growth firms 7 Tables 1 Large firm dominance in South Africa compared with peers and the European Union, 2019 4 A1 Ranking of measures through the “FIT” filter of feasibility, impact, and timing 15 iii ■ Determine what is stifling private sector growth and unleash its potential Private sector growth is the key to rapid and inclu- green industries, where the country already pos- sive economic development. When firms expand, sesses strategic assets and has the potential to they invest in capital and technology, hiring more generate numerous direct and indirect employment people and fostering virtuous circles between prod- opportunities, and supporting the emergence of uct and input markets, crucial for inclusive growth. dynamic and high-growth small and medium start- This model has not yielded the desired outcomes in ups. In each of these areas, emphasis should go first South Africa for many years, however. On average, to short-­ term actions that create momentum for firms have lost about 8%–10% of their productivity longer term reforms. To guide policymakers, this since 2011, meaning that they are becoming less ef- note presents a menu of seven actions under two ficient at using resources. These productivity loss- key priority areas, along with suggested reforms. Swiftly changing es, unprecedented globally over such an extended Swiftly changing global dynamics make it even global dynamics period, undermine competitiveness and inhibit the more imperative that South Africa act rapidly to fa- ability of the country’s initiatives to alleviate some cilitate private sector dynamism.1 The rapid emer- make it of the highest unemployment, poverty, and in- gence of megatrends, including fast-­ moving tech- imperative that South Africa equality rates globally. nological advances, presents both opportunities for To end this stagnation, policymakers need to innovation and growth and challenges such as digi- confront the stultifying presence of the state, tal exclusion and job displacement. Climate change act rapidly which has increasingly curbed the growth potential compounds the challenges, manifesting particularly to facilitate of the private sector. Complicated and restrictive as extreme weather events and shifts in agricultur- regulations, along with direct market interventions al patterns within the country. Additionally, geo- private sector such as those of state-­ owned enterprises (SOEs) political shifts and the emergence of new regional dynamism ■ with quasi-­ monopolistic control, have created mar- trade agreements, notably the African Continental ket distortions. Creative destruction, the natural Free Trade Area, are altering trade, investment, and process of new firms entering the market and mori- geopolitical alliances. Successfully navigating these bund ones exiting, which is vital for a vibrant private global megatrends to increase the country’s resil- sector, has been largely absent. This stagnation has ience and enable sustainable development necessi- stifled innovation and diverted human and financial tates strategies that capitalize on opportunities and resources from future technologies and industries, address challenges. A robust and thriving private disadvantaging both workers and customers. sector is critical to this effort. Decisive reforms are essential to foster dyna- mism in the private sector. The government needs South Africa’s story of low productivity to focus on establishing an enabling environment and the imposing presence of the state that supports firms with the greatest growth po- Productivity improvements are the foundation tential. Attention needs to focus on two connect- for the dynamic firm behavior that is so crucial ed areas: promoting competition and foreign direct for economic growth and job creation. As Nobel investment (FDI), particularly in digital finance and Laureate Paul Krugman argued, “productivity isn’t 1■ everything, but in the long run it’s almost every- over that period been the same as India’s, its GDP thing.” Productivity rises when firms boost their would have grown by 6.6% a year. firm productivity gains internal capabilities (within-­ South Africa’s declining productivity has affect- through innovation or adoption of new technolo- ed the entire economy but has been especially evi- gies or better management techniques) or when re- dent in labor. The gap in labor productivity between sources move from low- to high-­ productivity firms South Africa and the global average has widened (between-­ firm productivity gains) as less efficient in all sectors, with the biggest declines in agricul- firms exit the market and new, more efficient firms ture and manufacturing (figure 2). World Bank enter it. Each of these components has a positive enterprise surveys find even wider gaps between impact on aggregate productivity growth and eco- South Africa and other emerging market economies nomic transformation. (figure 3).2 While there have been “niches of excel- lence” in South Africa, such as in communication, ■ Understanding South Africa’s productivity losses are costly they are rare. South Africa’s Understanding South Africa’s productivity chal- South Africa’s productivity declined 0.8% a year lenge is crucial because of the direct effects on eco- productivity over the past decade, explaining to a large extent nomic growth and inclusion and the indirect effects challenge is the limited expansion of the economy. Contrast this on the accumulation of physical and human capital crucial because weak performance with the rapid annual productivi- and the country’s competitiveness in internation- ty growth in successful economies like India (+2.7%), al markets. Empirical evidence shows that low-­ of the effects on Vietnam (+1.2%), China (+1.1%), and Malaysia (+0.5%) productivity firms struggle to invest adequately economic growth (figure 1). Had South Africa’s productivity remained in physical and human capital and to develop new the same as it was in 2011 instead of declining, its technologies, and those investment deficits exacer- and inclusion, GDP would have expanded by 3.9% a year between bate their productivity woes.3 This vicious circle ex- accumulation 2011 and 2022. And had its productivity growth plains why South Africa’s employment, exports, and of physical and Figure 1  South Africa is on the wrong side of Figure 2  The gap in labor productivity between human capital, and productivity growth, 2011–2022 South Africa and the world is widening in all competitiveness Growth decomposition (percent) sectors, 2001–2017 in international 12 Labor productivity gap (Index: 2001 = 1) markets Real GDP 3 9 Agriculture 6 2 Manufacturing 3 Tradable services 1 Nontradable services 0 –3 South Malaysia Türkiye Vietnam China India Africa 0 2001 2010 2017 Capital stock Labor Total factor productivity Source: Authors using data from World Development Indica- Source: Authors using data from World Development Indica- tors database. tors database. Note: Solow growth decomposition. ■ 2 Priority 4: Injecting dynamism into the private sector Figure 3  Drastic declines in labor productivity in Figure 4  South Africa has lost its development South Africa relative to peers edge compared with Malaysia, 1990–2019 Real annual labour productivity growth (percent) Multiplier 5 8 South Africa 7.3 Malaysia 2.3 2.2 0 –0.8 6 5.9 –4.3 –4.9 –5 4 3.9 –10 2 2.3 2.3 –15 –16.9 1.4 –20 0 India Indonesia Malaysia South Türkiye Vietnam Value of Value of Employment Africa capital stock exports (millions) .enterprise​ Source: World Bank Enterprise Surveys (https://www​ Source: IMF and World Bank databases. surveys.org/). South Africa’s Figure 5  Entry and exit of firms, 2021 Note: The enterprise survey was conducted in different years productivity in different countries. It was conducted in India in 2022, Indonesia in 2023, Malaysia in 2019, South Africa in 2020, Percent of adult population decline is, to a Türkiye in 2019, and Vietnam in 2023. 15 Net entry large extent, 13.9 Destruction rate caused by physical capital (as measured by the value of capital the lack of stock) expanded much slower than Malaysia’s, for 10 9.8 competition in example, between 1990 and 2019 (figure 4).4 most economic Low competition, low productivity 6.5 sectors, 5 which allows South Africa’s productivity decline is, to a large ex- tent, caused by the lack of competition in most eco- incumbents nomic sectors, which allows incumbents to remain 1.3 2.1 2.0 to remain unchallenged, sapping their drive to innovate. Lack unchallenged ■ 0 South Global Upper middle of competition weakens the creative destruction Africa income process, whereby obsolete firms are replaced by innovate ones, and results in the lack of dynamism Source: Global Entrepreneurship Monitor. that has characterized the private sector in South Africa for years: • Large firms have changed little over time. Of the • Small and medium enterprises (SMEs) have 10 largest companies (by capitalization) in South grown more slowly in South Africa than in other Africa, 8 were also among the top 10 in 2000. middle-­ income countries. The net rate of new Most of these firms are in traditional sectors like firm entry is notably sluggish, at approximately finance and mining, with two exceptions in the 60 percent of that in countries at similar income communication sector. levels (figure 5). Priority 4: Injecting dynamism into the private sector 3■ Figure 6  Foreign direct investment lags that in So, the dominance of large incumbent firms has peer economies, 2011–19 been only weakly challenged. Large incumbents continue to hold disproportionately high shares of Net inflow (percent of GDP) revenue and employment in South Africa compared 5 with other middle-­ income countries and counter- 4.8 4.6 parts in the European Union (table 1). The domi- 4 nance of large incumbent firms makes it difficult for new firms to enter the market and allows incum- bents to benefit from high markups. In concentrat- 3.3 3 ed markets, where firm entry and exit are limited, markups exceed global standards.5 Markups by 2 2.2 publicly listed firms increased 25% in South Africa from 2000 to 2016, more than four times the aver- 1.6 age global increase (6%).6 1 1.1 Market concentration has substantial costs for the economy, and these have risen over time.7 0 When market power is concentrated in a few domi- South Türkiye China Malaysia Vietnam Brazil Africa nant firms, markets are unlikely to innovate and find solutions that will allow them to remain competitive Source: Authors using World Bank data. https://data.world​ over time. The International Monetary Fund esti- bank.org. mates that South Africa could boost GDP per capita growth by 1 percentage point in the short term and ■ Firms in South • The private sector’s lack of dynamism makes it up to 2.5 percentage points in the long-­term by im- Africa face harder to attract high-­ value FDI. While South proving contestability in key markets. 8 Africa is host to several multinationals, they tend elevated entry to be heavily concentrated in natural resources Excessive government intervention reinforces private and operational sectors. The country’s attractiveness to FDI lags sector inertia costs economies like Türkiye, China, Malaysia, Viet- nam, and Brazil (figure 6). Numerous studies have concluded that firms in South Africa face elevated entry and operational costs (figure 7).9 Some costs, such as those associ- Table 1  Large firm dominance in South Africa ated with crime, corruption, and access to electric- compared with peers and the European Union, ity, were as high as or higher than the average for 2019 Sub-­ Saharan Africa in 2020, and some have likely Share of Share of risen since then due to breakdowns in infrastructure labor force national GDP services, especially electricity, transport, and water. Country or group (%) (%) Other costs are related to factors within firms, such South Africa 74 61 as limited skills, poor internal organization, and out- Middle-­income dated technology and equipment. And still others countries 35 54 are related to serious failures by key stakeholders, European Union 32 43 such as the government, banks, and skill developers. Government failure is evident in the top constraint Source: McKinsey, 2020, ”How South African SMEs can sur- reported by firms, which is the poor quality of elec- vive and thrive post COVID-19,” https://www.mckinsey.com/ tricity services (the sector is dominated by the pub- featured-insights/middle-east-and-africa/how-south-african​ lic utility Eskom; see policy note 2) and other public -smes-can-survive-and-thrive-post-covid-19. goods such as transport, water, safety, and justice. Note: Large firms are defined as firms with a turnover of more Excessive and poorly designed public interven- than $22 million a year. tions have stifled private sector dynamism. The ■ 4 Priority 4: Injecting dynamism into the private sector 10 constraints reported by South African and Sub-­ Figure 7  The top-­ Saharan African firms, 2020 Percent of firms 60 50 South Africa, 2020 40 30 20 Sub-Saharan Africa 10 0 Electricity Access to Political Corruption Crime, theft, Courts Practices of Labor Access Tax finance instability and disorder the informal regulations to land rates sector Source: World Bank Enterprise Survey 2020. South African government has employed various and agriculture (figure 8).13 Several SOEs have industrial and labor policies to tackle historical ex- been found to have breached competition laws clusion, but in the process has created market dis- in trying to consolidate their market power.14 tortions and raised entry costs. Two undesirable Further, due to weak sectoral regulations and outcomes have been market dominance by SOEs corporate governance, many SOEs deliver poor and poorly designed regulations that suppress firm quality services, while facing huge financial and growth and competition:10 technical challenges. In addition to the electricity • Dominance of SOEs in several strategic sectors sector, such deterioration is evident in the water that deliver basic goods and services. During and transport sectors (see policy notes 2 and 3). Apartheid, large SOEs or “national champions” These inefficiencies in network industries create Productivity were established to provide subsidized resourc- substantial costs for businesses, lowering their needs to grow es for industrial production, leading to concen- productivity and depressing domestic demand.15 trated ownership and anticompetitive practices. • Well-­intended but poorly designed regulations 1%–2% a year International trade restrictions further strength- to correct market failures. South Africa’s SMEs to move South Africa toward ened incumbents’ market power. Building on the spend an average of 202 working days (3.7% of initial success of this model (for example, the the total workforce for the average SME) and public electricity utility Eskom was considered $39,000 (R532,801) annually on administrative high-­income a global leader in the early 2000s), 22 primary tasks.16 Additionally, labor regulations to protect country status SOEs and 82 subsidiaries are now operating in workers disproportionately burden small firms around 180 business segments along 47 supply by impeding their ability to hire and thus exac- and significantly chains.11 The World Bank’s Global Businesses of erbate unemployment, especially among youth. reduce poverty the State database records at least 725 active Furthermore, industrial and affirmative action by 2050 ■ businesses linked to the government through di- policies like the Broad-Based Black Economic Em- rect and indirect full, partial, and minority owner- powerment Act (B-­ BBEE), which are intended to ship.12 Shielded by protective policies, they wield extend shareholding to historically marginalized quasi-­ monopolistic power in network industries groups, have not been evaluated for effective- (energy and transport) and dominate in commer- ness and forgone public revenue, while creating cial activities such as manufacturing, finance, additional market distortions.17 Finally, there are Priority 4: Injecting dynamism into the private sector 5■ Figure 8  A majority of South African state enterprises operate in competitive sectors of the domestic economy, and they operate across an unusually wide range of sectors Nearly all state enterprises operate in competitive or The broad sectoral reach of South African state enterprises contestable economic segments  Percent 100 Finance Manufacturing Professional services Wholesale and retail trade 75 Digital Real estate Transport and storage Other services 50 Agriculture Construction Mining and quarrying Energy 25 Water and waste management Hospitality Unknown 0 0 25 50 75 100 125 150 South India Russia Vietnam Kenya Nigeria Brazil Africa Number of businesses of the state Competitive Contestable Traditional state-owned enterprises Natural monopoly Unknown All businesses of the state Source: World Bank Global Businesses of the State database 2019. severe regulatory limitations to competition in by liberalizing markets to increase contestability key sectors of South Africa’s economy: the level and competition, which are the main forces propel- ■ High-­growth of restrictiveness is close to three times high- ling a creative and dynamic economy. Other coun- firms are powerful er than that in the top-­ performing countries.18 tries have derived substantial gains from following these practices , not only creating a dynamic pri- drivers of job Unleashing the potential of high-­growth vate sector, but also reducing pressure on the pub- creation and firms, with a focus on two priority areas lic budget, creating new jobs, and producing more, output growth For the private sector to drive growth and em- better quality, and less expensive products. ployment in South Africa, productivity will need to Sustained productivity growth does not nec- by transferring rise 1%–2% a year. This is the rate of productivity essarily stem from improvements across all busi- knowledge, growth required to move South Africa toward high-­ nesses simultane­ ously but is typically driven by income country status and significantly reduce pov- advances in a small set of high-­ growth firms.20 A creating networks, erty by 2050, according to the long-­ term growth recent World Bank study found that high-­ growth and fostering model developed by the World Bank.19 While fast-­ firms are powerful drivers of job creation and out- competition growing economies in Asia have attained this rate put growth.21 While making up 20% or less of firms of productivity growth (see figure 1), it would rep- in manufacturing and services, high-­ growth firms resent a substantial turnaround for South Africa. generate as much as 80% of all new sales and job To achieve this goal, South African policymakers opportunities in these sectors. Apart from their piv- could apply two key lessons from successful econ- otal contribution to job creation and output growth, omies. First, focus on creating a conducive environ- high-­growth firms also produce positive spillovers ment that fosters the development of high-growth to the economy by transferring knowledge, creat- firms and industries that could in turn provide wide ing networks, and fostering competition, leading to economic benefits. Second, minimize interventions price reductions. ■ 6 Priority 4: Injecting dynamism into the private sector Most high-­ growth firms in rapidly growing econ- benefited from global forces and the technolog- omies emerge from two transformational process- ical revolution, but the results would likely not es. First, many high-­ tech startups experience rapid have been as impressive had the authorities not A strategy to and sustained growth due to qualities intrinsic to fostered greater contestability. This lesson could support the the firm. Examples include Flipkart in India, Airbnb be replicated in other sectors, such as digital fi- in the United States, and Bolt in Estonia. The pol- nance and green industries. creation and icy objective is to provide such firms with access • Upgrading the capabilities of high-­ growth SMEs. A scaling up of high-­growth to financial and technical resources that allow them combination of steps to facilitate firm entry and to realize their potential. Second, some high-­ growth expansion can unleash their potential. The emer- firms emerge in strategic sectors in which the coun- gence of a vibrant SME startup and expansion firms in South try possesses or is cultivating a strong comparative ecosystem will not only generate productivity Africa could advantage. Examples include apparel and electron- gains but also gradually erode the dominance of ics in Vietnam, green industry in China, and call incumbent firms, increasing competition, creat- focus on center services in the Philippines. ing jobs, boosting innovation, and further ele- upgrading SME Targeting high-­ growth firms­ —­ by aiming to boost vating productivity over time. capabilities policy selectivity and efficiency­—­ has become increas- These two priorities could be supported by a set ingly appealing to policymakers in both high-­ income of seven actions and 18 proposed reforms. These and fostering and developing countries. However, for venture capi- actions and proposed reforms were selected for competitiveness talists as well as policymakers, it is more an art than a technical and political feasibility, ability to make a science to identify businesses with high ­ potential and difference (impact), and the feasibility of their im- in industries implement measures to expedite their growth. plementation in the short term. While the most de- of the future ■ Drawing from these lessons, this note advocates sirable actions would ideally meet all three criteria, a targeted strategy to support the creation and tradeoffs are likely to arise (see table A1 in the annex). scaling up of high-­ growth firms in South Africa by Of the 18 reforms, 5 have been assessed as the focusing on two priority areas: most technically and politically feasible, impactful, • Fostering competitiveness in industries of the and timely: future. Firms operating in these sectors need 1. Strengthening oversight of SOEs and liberaliz- to adapt to shifts in technology and consumer ing the markets in which they operate  to im- demand. Recent successes in the telecommu- prove their performance and make room for nication and aviation sectors demonstrate that private sector investments. South Africa can increase contestability by re- 2. Streamlining firm entry and operational prereq- ducing barriers to entry and aligning incentives uisites for foreign investors related to the 2013 to market needs. Today, after liberalization mea- B-­BBEE Act b  y making systematic use of Eq- sures in the early 2000s, the telecommunica- uity Equivalence Investment Programs when tion sector in South Africa is one of the most investors commit to train Black workers and advanced in the region, connecting more than develop supply chains with local businesses. 203  million people in 22 countries across Afri- 3. Authorizing nonbank institutions to issue mo- ca and the Middle East. The sector undoubtedly bile money  to reduce transaction costs and growth firms Figure 9  A guiding framework for prioritizing policies to enhance the development of high-­ Action 1: Upgrade the competition framework Priority 1: Fostering competitiveness Action 2: Facilitate foreign direct investment in industries of the future Action 3: Harness the growth of digital finance Enhancing performance of high-growth firms Action 4: Foster green industries Action 5: Facilitate access to finance for small and medium enterprises Priority 2: Upgrading the capabilities of high-growth small and medium firms Action 6: Upgrade workers’ and managers’ skills Action 7: Incentivize labor search and mobility for low-income earners Priority 4: Injecting dynamism into the private sector 7■ improve the financial inclusion of small and ■ Action 1: Upgrade the competition framework informal businesses. 4. Increasing liquidity in carbon credit markets  to Promoting competition and creating a level playing incentivize the shift to green sectors. field for firms will entail comprehensive reforms to 5. Increasing the provision of venture capital for prevent market dominance by a few firms, including high growth startups  to improve their access SOEs. Sustained efforts will be required to bring to external financing. about significant change. In the meantime, immedi- ate attention could be given to: Priority area 1: Fostering competitiveness • Enhancing the competition policy framework. Elim- in industries of the future inating regulations that restrict competition is an While promoting market openness is a fundamental important first step, as Australia, Chile, Colombia, principle underlying the recommendations in this and other countries have done to great effect. note, implementing it universally may prove chal- Systematic assessments of current regulations lenging, for two main reasons. First, strategic sec- and incentives are needed to evaluate their de- ■ South Africa’s tors, particularly infrastructure, may require direct sign appropriateness and impacts, including direct financial market state intervention due to their inherent public goods and indirect effects on markets, and to identify nature. Second, introducing measures to promote gaps requiring attention. Enforcement could be is the most competition and contestability could face opposi- strengthened by incorporating the perspectives of developed on tion from incumbent firms and interest groups that the Competition Commission of South Africa into the continent, could lose privileges during the transition. sectoral reforms aimed at promoting competition These challenges suggest the need to achieve and mitigating the risks of abuse of dominance. but small firms short-­term results and demonstrate successes. • Strengthening oversight of SOEs, and liberaliz- face the same Prioritizing knowledge industries has been a suc- ing the markets in which they operate  in order cessful strategy in several fast-­ growing economies, to attract private investments. In the short to challenges in such as Chile, Korea, and Malaysia, with productiv- medium terms, this will require systematizing getting access to ity increasing twice as fast in these industries as in information on the real economic footprint of financial products others and contributing substantially to job creation the state, including the government’s indirect in both developed and developing countries over and minority shareholdings. In the medium term, as they do in the past decade.22 the government could clearly delineate the dif- other countries South African policymakers could focus on two ferent economic rationales for state ownership future-­directed knowledge- and technology-­ intensive in commercial and noncommercial sectors, thus sectors: digital finance and the green econ­ omy­—­ separating their mandate. This would introduce activities that are just emerging in the country. This checks and balances for SOE expansion and approach would align with South Africa’s emerging state ownership of businesses, while identify- strengths in these two sectors, where investor in- ing less distortive mechanisms to achieve policy terest is already evident, including that of foreign objectives. Additionally, oversight mechanisms investors. Prioritizing digital finance and the green should be restructured to strengthen the gov- economy would require developing the skill and ernance frameworks and practices of SOEs by technology capabilities needed to meet current incorporating good governance principles into and future demand from local and international SOE management to enhance their perfor- consumers, driven by technological advances and mance. Systematically evaluating SOEs’ attain- climate considerations. ment of public policy goals is also essential, as is Four policy actions are proposed to maximize identifying the risks SOEs pose. the competitiveness of strategic, forward-­ looking sectors. Two are cross-­ sectoral and aim to improve ■ Action 2: Facilitate foreign direct investment the competition framework and ease the barriers to entry for FDI, and two are specific to digital finance FDI has been crucial to the success of East Asian econ- and the green economy. omies, allowing them to catch up with more advanced ■ 8 Priority 4: Injecting dynamism into the private sector economies, which own most of the new technologies. commit to train Black workers and develop sup- This channel has become even more important as the ply chains with local businesses. The B-­ BBEE pace of innovation has accelerated. Attracting foreign requires companies to meet specific thresholds investors is an explicit element of South Africa’s de- of Black ownership and management control velopment strategy, supported by significant reduc- to participate in government tenders and con- tions in entry barriers23 and by top officials promoting tracts. While the B-­ BBEE is well intentioned, South Africa at international trade events. managing required scorecards places a heavy Despite these efforts, South Africa has fallen burden on public administration and foreign short of its goal of attracting more and higher qual- companies. The government has taken actions ity FDI (see figure 6). One factor behind this un- to reduce this burden by adopting the Equity derwhelming performance has been the confusing Equivalence Investment Program, which has signals sent by the authorities to investors. On the been applied to IT companies (Microsoft and one hand, the authorities have lowered barriers and Amazon Web Services) and banks (J.P. Morgan) offered cash grants, tax allowances, concessional since 2021. This revised approach replaces B-­ funding, and preferential infrastructure access BBEE requirements with local worker training through a complex targeting system to attract FDI.24 and supply chain development with local com- On the other hand, various industrial policies (such panies. The government’s next step could be to as the B-­ BBEE, local content requirements, and extend these programs more broadly by clearly public procurement), though not explicitly targeting outlining eligibility criteria for investors interest- foreign companies, have significantly increased the ed in participating. cost of doing business in South Africa. These poli- • Exempting investment projects in strategic sectors cies often discourage foreign firms, which typically in export processing zones from national regula- operate on a global scale and can easily opt for lo- tions. In China and Vietnam, where national laws cations with fewer economic obstacles. and regulations impose substantial burdens on A better approach for South Africa is to stream- enterprises, as in South Africa, governments es- line entry and operational requirements for foreign tablished “geographic islands” where exporters investors. Both economic theory and real-­ world evi- dealing with foreign competition can apply ex- dence show that clear and stable regulations do more traterritorial laws and regulations. For instance, Promoting to attract FDI than complex benefit arrangements. labor laws in these geographic islands offer market Malaysia and Mauritius, two of the most successful greater flexibility in hiring and firing workers countries in attracting FDI, began to show results than do national laws and regulations, which is openness as they lowered standard tax rates while eliminating balanced by higher salaries or additional benefits may prove challenging—so most of their incentives during the past 10 years. in areas such as housing, schooling, and training. This policy change enabled them to lower both in- • Accelerating the issuance of work permits for vestment costs for foreign firms and the associated qualified workers. Foreign investors often en- there is a need monitoring expenses for public administrators. counter barriers in the form of complex work to achieve The first-­best option would be to replace most permit requirements to bringing in expatriate incentives with a more investor-­ friendly common staff with specialized skills. Simplifying the work short‑term regime that is easy to navigate for investors, as Ma- permit process for skilled professionals through results and laysia and Mauritius have done. However, given the streamlined visa procedures, as in Malaysia and demonstrate complex social and political context in South Afri- the United States, could go far in attracting and ca, the government could consider the simpler and retaining high-­ value investments and facilitating successes ■ more practical approach of focusing on the most knowledge transfers to South Africa. Expediting binding constraints: the proposal to streamline business visa proce- • Streamlining firm entry and operational prerequi- dures would be instrumental in achieving this BBEE for foreign inves- sites related to the 2013 B-­ goal. For example, professionals who earn above tors  by making systematic use of Equity Equiv- a certain high salary (say, R40,000 a month) and alence Investment Programs when investors have a contract with a recognized tax-­ paying Priority 4: Injecting dynamism into the private sector 9■ firm in good standing could be granted a limited-­ financial services. The South African author- time visa (say, three years), subject only to the ities, led by SARB and the National Treasury, usual health and criminal background checks. are amending the National Payments Act to allow nonbanks to access the payments systems ■ Action 3: Harness the growth of digital finance and participate in the Payments Association of South Africa. This move aims to enhance com- South Africa’s financial sector is by far the most de- petition in the banking sector, reduce costs for veloped on the continent, but costs are high, mak- customers, and promote financial inclusion. In- ing access to financial services difficult for smaller tegrated universal QR codes and interoperabili- firms and poor households. The transition to digital ty between payment providers, as in the Quick ■ Foreign direct banking and the emergence of financial technolo- Response services in Ghana and Nigeria, will be investment has gies (fintech) offer an opportunity to lower access crucial for enabling this transition. barriers through a diverse range of new products • Developing a framework for open finance. Many been crucial to the and services, including online banking, mobile pay- countries have implemented a framework for success of East ments, peer-­ to-peer lending, digital wallets, and open finance, a multilateral and open data-­ Asian economies; financial management tools. Fintech is intensifying sharing regime that enables all parties that meet competition for banks, which are under pressure to defined requirements to exchange data, includ- attracting foreign upgrade their services. ing customer data. The policy motivations for investors is an To leverage the development of digital finance, open finance include increasing competition in South Africa could adopt a series of simple-­ to- concentrated financial markets by allowing new explicit element implement measures in the short-­ term, as Kenya, Ni- entrants to engage with consumers and their fi- of South Africa’s geria, and several other countries in Africa have done: nancial data more easily, simplifying the know-­ development • Adjusting South African Reserve Bank (SARB) your-customer process, encouraging product regulations to ease administrative process for the innovation through better consumer data and strategy entry of fintech providers. Key hurdles include enabling payment initiation, and deepening fi- unclear application of regulations and lengthy nancial access and inclusion for consumers. Less licensing processes for new fintechs. While reg- than two years after its launch, Brazil’s open ulations are vital for quality assurance and con- finance system reported serving more than sumer protection, a balance is needed that also 27 million customers with 41 million accounts as seeks to minimize entry barriers. For instance, of September 2023. the SARB can improve and streamline the cur- rent sandbox process,25 expanding its scope ■ Action 4: Build a platform for developing a green in the medium term and establishing a fintech economy using catalytic market instruments roadmap for post-­ sandbox engagement. The framework developed in the European Union South Africa should move gradually but decisively can serve as reference. from a strategy based on its historical advantage in • Authorizing nonbank institutions to issue mobile coal to leveraging its assets in the green economy. money. While mobile money was introduced in Not only does the country have abundant natural South Africa as early as 2010, nonbank insti- green energy resources, such as sunlight, wind, vast tutions, such as mobile network operators and land areas, and valuable minerals like platinum and fintechs, have not been authorized by the mon- chromium, but it also boasts one of the most robust etary authorities to issue e-­money or access the mining and industrial bases. These resources can be national clearinghouse and settlements system. used to produce products like batteries and elec- This precautionary measure may be excessive tric vehicles, which will be in high demand in global now that e-­money has proved to be a secure and markets in coming decades.26 The government has innovative payment solution in many countries. recognized this opportunity, understanding that the E-­money has evolved to support electronic pay- transition to a green economy can provide a new ments and serve as a platform for distributing impetus for the country’s development and address ■ 10 Priority 4: Injecting dynamism into the private sector the urgent need for more jobs.27 The transforma- prioritize offsets that generate sustainable devel- tion to a low-­ carbon economy could generate up to opment co-­ benefits and employment opportu- half a million jobs by 2050.28 nities within South Africa, while simultaneously The transition to a green economy is a shared ob- increasing the number of credits available on the jective of most countries, and South Africa needs to market and fostering cost-­ effective mitigation of act swiftly to leverage its advantages and establish greenhouse gas emissions. itself as a regional leader.29 While large investments • Reorienting incentives and support programs from in physical and human capital will be necessary to fossil fuels toward new green activities. Under its manage this transition efficiently, the process can G20 commitments, the South African govern- be fast-­ tracked by introducing a series of market in- ment attests that it does not provide fossil fuel struments that will incentivize both the government subsidies that encourage wasteful consump- and the private sector to move in this direction:30 tion. In practice, however, Sasol, which sup- • Accelerating implementation of the carbon tax. plies roughly 30% of the country’s fuel and is The government is following a phased approach the largest contributor to the country’s carbon South Africa’s to implementing a carbon tax. Introduced in emissions, benefits from preferential arrange- financial sector 2019, the carbon tax combines a low tax rate ments, such as the fuel pricing mechanism and and numerous exemptions until 2026 to allow a recent carbon tax exemption. These prefer- is by far the firms to adjust to the new conditions. Howev- ential benefits are costly for taxpayers and slow most developed on the er, the carbon price remains effectively zero for the transition to a low-­ carbon economy. Addi- exempted activities, at $8.20 per ton of carbon tionally, support to the coal industry, including dioxide in 2023 and increasing to about $16 by debt relief packages provided to Eskom by the continent, but 2026. This rate is too low to induce significant National Treasury over the past decade, incurs costs are high, behavioral change, given that the estimated substantial costs to the state. damage from climate change resulting from a ton While such interventions may be partially making access of carbon dioxide emissions is $35. justified for energy security reasons, the gov- to financial The recommendation is to streamline the list ernment can gradually shift its support toward services difficult of exempted activities and accelerate the carbon green activities, for example, by financing a tax rate increase. Another reason to expedite the temporary value-added tax exemption and sub- for smaller carbon tax is that, when entering industrial coun- sidizing credit lines on the purchase of renew- firms and poor try markets, South African exports will increas- able energy equipment by small businesses and ingly face a carbon tax on carbon-­ intensive prod- households (see policy note 2). These resources households ■ ucts, like the EU’s Carbon Border Adjustment could also be used to finance the exploration Mechanism. From a fiscal perspective, it would of new mineral deposits and the development be more advantageous to collect this tax domes- of green industrial parks. Encouraging devel- tically rather than paying foreign governments. opment of the battery industry in South Africa If the concern is to maintain firms’ competitive- could also yield substantial benefits, considering ness during the transition, the government could the country’s potential to be a major player in consider reducing other taxes, such as those on this industry (box 1). labor, to stimulate job creation by easing labor costs and incentivizing firms to increase energy Priority area 2: Upgrading the efficiency and invest in cleaner energy sources. growth small and capabilities of high-­ • Increasing liquidity in carbon credit markets. Car- medium enterprises bon credit markets have already been quite suc- In recent years, the government has started to em- cessful in South Africa, but the markets have es- phasize promoting agile and innovative small firms.31 sentially been dominated by one company (Sasol). The Department of Small Business Development is Developing domestic standards for local service deploying a one-­ stop shop to streamline business providers to issue and validate carbon credits registration and has proposed a series of support could broaden the market. Such standards could programs to facilitate access to cheaper credit and Priority 4: Injecting dynamism into the private sector 11 ■ to upgrade skills.32 Yet, a 2020 McKinsey survey re- Box 1  South Africa’s strong potential in the battery market veals that only 36% of small firm owners acknowl- South Africa has the opportunity to play a significant role in the global edged receiving any kind of government support, battery value chain, which is likely to grow by more than 3,000 gigawatt either because of lack of awareness or because of hours (GWh) by 2030. The country’s domestic battery storage market is procedures that are perceived to be complex and expected to reach 10 GWh by 2030, driven primarily by the electric vehi- uncertain.33 Closing the information gap and stream- cle sector. Integrating renewable energy sources into the grid, particularly lining procedures could help, but more actions are solar photovoltaic and wind, necessitates adequate storage solutions, such as battery energy storage systems, to balance the grid. South Africa has al- needed. SMEs face deep structural constraints that ready released grid-­ scale energy storage tenders in response to this need. require fundamental changes, including removing The projected expansion could potentially create 25,000–55,000 direct obstacles in addition to simplifying processes. and indirect jobs, depending on various factors. A menu of three actions is proposed to acceler- South Africa is well-­endowed with many of the minerals needed to pro- ate the development of SMEs. These actions aim to duce lithium-­ stage activities in this ion batteries. It has benefited from early-­ facilitate their access to finance, to upgrade their value chain as well as from a diversified automotive industry that is strongly earning workers to join skills, and to incentivize low-­ dependent on exports and will need to transition to the manufacturing the labor force or become entrepreneurs. of electric vehicles. Battery pack assembling and battery energy storage system integration opportunities also exist. Battery cell manufacturing at the estimated needed market scale is feasible. More challenging for South ■ Action 5: Facilitate access to finance for small and Africa is producing cathode active–material, lithium salts, and separators. medium enterprises Achieving the required manufacturing scale (15–20 GWh equivalent) and overcoming technological barriers require working at a larger scale than the South Africa’s financial market is the most devel- domestic market. Additionally, local companies would require technological oped on the continent, but small firms face the same support from entities with a substantial market presence. challenges in getting access to financial products as The government plays a crucial role in directing industrial policy toward they do in other countries. The World Bank esti- developing the local battery value chain, prioritizing the production of minerals, battery materials, and energy storage systems for stationary and mates that only one in three SMEs in South Africa, industrial use. Despite the region’s abundant stores of battery minerals, including just 15% of startups, benefit from external mineral beneficiation has declined in South Africa. To help South Africa financing, which is similar to the regional average but enter the global battery value chain, the government could: lower than in Ghana and Kenya.34 This is dispropor- • Explore policies and incentives for the beneficiation of battery minerals. tionately low given the size of the domestic credit • Foster regional collaboration through bilateral trade talks with neigh- market (equivalent to 120% of GDP) and the avail- boring countries Democratic Republic of Congo, Mozambique, Tanza- ability of more than $600 billion in private wealth, nia, and Zimbabwe. • Establish a research program on energy storage systems, with a focus including funds accumulated by pension funds, and on engineering, manufacturing technologies, and systems integration. reflects both supply and demand weaknesses. • Establish a competitive battery testing and certification facility. Nonetheless, several short-­ term improvements • Facilitate the establishment of a training program for the battery indus- are feasible: try by the Energy and Water Sector Education Training Authority in • Increasing the provision of venture capital for collaboration with universities and the battery industry. growth startups. Encouraging the develop- high-­ • Improve access to finance, possibly with subsidized credit through ment of venture capital can reduce the financing public-­private sharing instruments. challenges faced by SMEs. Scaling up private– • Consider tax incentives for investments in this sector, such as acceler- ated depreciation of credits. public initiatives such as the South Africa SA • Introduce regulations to encourage the use of electric vehicles, which SME Fund has considerable potential. Estab- will increase domestic demand for batteries. lished as a collaboration between government • Streamline and accelerate the application process for projects. and business, this initiative has raised funds from Some of these actions will incur fiscal costs. To make them budget the Public Investment Corporation and some neutral, the authorities will have to reallocate some existing energy subsi- ­ 50 publicly listed firms, channeling more than dies to the battery industry. based capital to $65 million (R3.61 million) in risk-­ Source: World Bank, 2023, Battery Storage Market and Value Chain Assessment in South small and innovative firms in less than two years. ­ —Synthesis Report (English). Washington, DC: World Bank. http://documents.world​ Africa­ sharing model, in which government This risk-­ bank​ /curated​ .org​ /en/099155502102332395/P17268201ebc89050b1960f40c83775 23a. assumes the first loss, could be extended to ■ 12 Priority 4: Injecting dynamism into the private sector domestic institutional investors (such as pension particularly affect disadvantaged groups. To ad- funds, which own assets equivalent to 100% of dress this, the authorities could consider: GDP). In several Organization for Economic Co-­ • Scaling up workplace-­ based learning programs in operation and Development (OECD) countries, SMEs. These programs are currently highly con- such funds are authorized, under strict regu- centrated in large firms. This measure is further lations and supervision, to invest in small busi- detailed in policy note 1. nesses and funds. They contribute to two-­ thirds • Improving training in digital skills, which are crit- of venture capital funds in the United States and ical for most SMEs. Digital technologies present one-­ fifth in Europe. an opportunity for SMEs in South Africa to ex- • Reviewing and redesigning public credit support pand their reach and lower the cost of increas- programs, phasing out direct lending, upscaling par- ing their efficiency. Around half of South Africa’s tial credit guarantees, and introducing monitoring SMEs have embraced digital technologies, but and evaluation frameworks. South Africa has more adoption rates are behind those of countries than 50 government credit programs, including including Brazil, Malaysia, and Türkiye, where direct lending, guarantees, and wholesale lending, adoption rates reach 70%. Data from the De- totaling 0.36% of GDP, or 2.8% of SME credit in partment of Higher Education and Training and 2020. Despite initiatives like Khula Credit Guar- LinkedIn show that 10 of the top 11 in-­ demand antee (KCG), underutilization persists due to eli- skills are in the information and communication gibility and risk criteria barriers. KCG guaranteed technology sector, with many job vacancies. R248 million in loans to 87 SMEs in 2020, a mere The government could partner with private 0.005% of GDP, compared with 0.03% of GDP information technology (IT) companies, follow- South Africa in Mexico and 4% in Korea. The impact of these ing the Philippine model, to foster early acquisi- should move programs remains uncertain, however, because tion of IT skills and improve tertiary IT education. data on nonperforming loans and robust impact This approach created more than 1.5 million IT/ gradually but studies are lacking. Improved coordination and business process outsourcing jobs in the Philip- decisively from a strategy consolidation, along with fintech integration, are pines, including through innovative local start- vital for enhancing SME credit delivery. ups. South Africa could also emulate Malaysia’s • Reforming policies and regulations to upgrade the national commercialization platform, PlaTCOM based on its credit information environment and the secured Ventures, which supports students and young historical transaction framework. Steps to strengthen the entrepreneurs in transforming ideas into digital credit information environment include mandat- products and services. advantage ing reporting of commercial credit information in coal to ■ Action 7: Incentivize labor search and mobility for by SMEs and commercial credit institutions to leveraging its credit bureaus, enhancing use of alternative data low-­income earners for assessing credit risk, and establishing a legal assets in the framework for a central credit registry. Other Increasing returns for low-­ income earners would green economy ■ steps include establishing a movable asset reg- boost employment and small enterprise creation. istry, which could reduce collateral requirement Low labor demand, high income taxes, and steep barriers and enable lenders to claim assets in transportation costs discourage workers from en- case of default, in alignment with the Depart- tering the labor market or starting businesses. ment of Small Business Development’s strategic A worker in South Africa typically receives only plan.35 Countries including Ghana, Nigeria, and half the income of a worker in Vietnam with the Zambia have adopted a movable asset registry. same base earnings (see policy note 3).36 Reduc- ing these costs would enhance firms’ ability to hire ■ Action 6: Upgrade workers’ and managers’ skills workers and incentivize individuals to establish their own businesses, particularly as many low-­ The skills deficit in South Africa is exacerbat- income workers enter the labor market through ed by deficiencies in the education system that employment. self-­ Priority 4: Injecting dynamism into the private sector 13 ■ The government can act quickly to reduce costs • Reducing the entry tax rate of the personal in- to low-­income workers and make employment a come tax from 18% to, say, 5%, or increasing the more attractive option: threshold for paying the personal income tax, an • Lowering transportation costs for low-­ income work- approach used in many East Asian economies. ers to improve job search. Transportation costs The benefit is clear for low-­ income workers absorb on average 80% of the earnings of low-­ (who will take home more money), and the costs income workers. Several solutions are discussed in to the government will be low, as South Africa’s policy note 3, including subsidizing trips in minibus top income decile contributes almost 80% of taxis, which are by far the most frequently used personal income tax revenue. mode of transportation by low-­ income workers. ■ 14 Priority 4: Injecting dynamism into the private sector Annex table A1  Ranking of measures through the “FIT” filter of feasibility, impact, and timing Feasibility Impact Timing Total growth small and medium enterprises Priority area 1: Upgrading the capabilities of high-­ Action 1: Facilitate access 1. Increasing the provision of venture capital for 3 3 2 8 to finance for small and ups high growth start-­ medium enterprises 2. Reviewing and redesigning public credit 2 2 1 5 support programs, phasing out direct lending and introducing monitoring and evaluation frameworks 3. Reforming policies and regulations to upgrade 3 2 1 6 the credit information environment and the secured transaction framework Action 2: Upgrade workers’ 4. based learning programs Scaling up workplace-­ 2 2 2 6 and managers’ skills in small and medium enterprises 5. Improving training in digital skills, which are 2 2 1 5 critical for most small and medium enterprises Action 3: Incentivize labor 6. Reducing the entry tax rate of the personal 2 2 1 5 search and mobility for income tax income earners low-­ 7. Lowering transportation costs for low-­ income 1 3 2 6 workers and job searchers Priority area 2: Fostering competitiveness in industries of the future Action 4: Upgrade the 1. Enhancing the competition policy framework 1 2 2 5 competition framework 2. Strengthening oversight of state enterprises 2 3 2 7 and liberalizing the markets in which they operate Action 5: Facilitate foreign 3. Streamlining firm entry and operational 1 3 3 7 direct investment prerequisites for foreign investors related to the 2013 Broad-­ Based Black Economic Empowerment Act 4. Exempting investment projects in strategic 1 2 1 4 sectors in export processing zones from national regulations 5. Accelerating the issuance of work permits for 1 2 1 4 qualified workers Action 6: Harness the 6. Adjusting South African Reserve Bank 2 3 1 6 growth of digital finance regulations to ease administrative processes for entry of fintech providers 7. Authorizing nonbank institutions to issue 3 3 3 9 mobile money 8. Developing a framework for open finance 2 2 1 5 Action 7: Build a platform 9. Accelerating implementation of the carbon tax 1 2 1 4 for developing a green 10. Increasing liquidity in carbon credit markets 3 2 2 7 economy using catalytic 11. Reorienting incentives and support programs 1 3 1 5 market instruments away from fossil fuels and toward new green activities Source: Authors. Note: The scores range from 1 to 3, with 1 being the lowest. The actions with the highest score are highlighted in yellow. Priority 4: Injecting dynamism into the private sector 15 ■ Notes 1. N. Stern and M. Romani, 2023, “The Global Growth 8. International Monetary Fund, 2020. IMF Working Story of 21st Century, Driven by Investment and Paper “African Department Market Power, Growth, Innovation in Green Technologies and Artificial In- ence,” and Inclusion: The South African Experi­ telligence,” Grantham Research Institute on Climate https://www.imf.org/-/media/Files/Publications​ Change and the Environment, January. /WP/2020/English /wpiea2020206-print-pdf.ashx. 2. These surveys were conducted in different years: 9. For a summary, see, World Bank, 2018, “An Incom- 2022 in India, 2023 in Indonesia, 2019 in Malaysia, plete Transition,” Systematic Country Diagnostic; 2020 in South Africa, 2019 in Türkiye, and 2023 in and World Bank, 2022, “Diagnosing South Africa’s Vietnam. For India and Indonesia, the surveys were High Unemployment and Low Informality.” conducted during or right after the Covid-19 pan- 10. International Monetary Fund, 2020. IMF Working demic, which could explain the declines. Paper “African Department Market Power, Growth, 3. For example, McKinsey (2020) estimates that a pro- ence,” and Inclusion: The South African Experi­ ductive firm in South Africa is 2.6 time more likely https://www.imf.org/-/media/Files/Publications​ to invest in research and capital accumulation than /WP/2020/English /wpiea2020206-print-pdf.ashx. an unproductive one. “How South African SMEs can 11. Considering direct and indirect shareholdings of the survive and thrive post COVID-19,” https://www​ state above 10 percent, the business of the state ex- .mckinsey.com/featured-insights/middle-east-and​ tends to 80 percent of the sectors (NACE-4 digit) -africa/how-south-african-smes-can-survive-and​ of the South African economy. World Bank, 2023, -thrive-post-covid-19. “The Business of the State” (Overview). https://​ 4. Contrary to common perception, productivity openknowledge.worldbank.org /handle/10986​ growth and employment growth are not mutually /4034303. exclusive goals. Recent empirical research shows 12. Data are from the World Bank Global Businesses that businesses with rising productivity contribute of the State (BOS) database, which tracks business significantly to investments in capital and technol- entities with a government stake of at least 10%, ogy and, critically, exhibit the highest increases in whether directly or indirectly owned by the nation- employment. R. Hornbeck and E. Moretti, 2019, al or subnational government. However, there was “Who Benefits from Productivity Growth? Direct special treatment for the subsidiaries of two SOEs in and Indirect Effects of Local TFP Growth on Wages, South Africa, the Public Investment Corporation and Rents, and Inequality,” NBER, Working Paper 24661, the Industrial Development Corporation. These two January, http://www.nber.org/papers/w24661. SOEs had large portfolios of subsidiaries with own- 5. See, for example, J. Fedderke et al., 2018, “Markups ership stakes of less than 50%. To help deal with all and Concentration in South African Manufactur- these subsidiaries in the data gathering stage, only ing Sectors: An Analysis with Administrative Data,” subsidiaries in which the two SOEs had ownership South African Journal of Economics, vol. 86 (January). stakes of at least 50% were included in the BOS 6. International Monetary Fund, 2020, IMF Working base for South Africa. data­ Paper “African Department Market Power, Growth, 13. IMF 2020. and Inclusion: The South African Experience,” 14. Of 21 abuses of dominance referred to the Compe- https://www.imf.org/-/media/Files/Publications​ tition Tribunal between 1999 and 2016, 13 involved /WP/2020/English/wpiea2020206-print-pdf.ashx. former or current SOEs. D. Healey, 2018, “Compe- 7. See P. Aghion and P. Howitt, 1998, “A Schumpete- tition Law and State-Owned Enterprises: Enforce- rian Perspective on Growth and Competition,” in F. ment,” OECD Global Forum on Competition, DAF/ Coricelli, M.D. Matteo, and F. Hahn, eds, New The- COMP/GF. ories in Growth and Development, London: Palgrave 15. SOEs receive direct and indirect budgetary support, m illan, https://doi.org/10.1007/978-1-349- Mac­ which entails a fiscal drain and risks. Direct budget- - 0_2. 26270​ ary support via bailouts to SOEs over the past five ■ 16 Priority 4: Injecting dynamism into the private sector years have averaged around R46 billion a year, and 24. https://www.thedtic.gov.za/wp-content/uploads​ dividend payments have been nearly zero. When /the-dti-incentive-schemes-guide-2021.pdf. Most of viewed from the perspective of opportunity costs, the incentives proposed by South Africa are based such budgetary support to SOEs is very costly. For on a complex set of criteria, including location, size of example, the bailouts are equivalent to 18% of the the enterprise, sector, and the size and race of the in- annual health budget and could have funded basic vestor. To illustrate, to qualify for a cost-sharing grant education for more than 2 million students. in agribusiness, projects have to have a minimum in- .small​ 16. For more information, see https://www​ business​ vestment of R1 million; have a B-BBEE level of 1–4; /2019/12/ILO​ institute.co.za/wp-content/uploads​ demonstrate that at least 50% of raw materials will be -Cost-of-Red-Tape.pdf. sourced from South African suppliers, 30% of which 17. C. Loewald and M. Stern M. (eds), 2023, Unlock- must be Black South African suppliers; can commence ing Growth Prospects in Post-pandemic South Africa, the project or activities applied for within 90 calendar South African Reserve Bank. https://www.resbank​ days after the application has been approved; and .co.za/content/dam/sarb/what-we-do/research​ must create additional jobs and pay at least the mini- /UNLOCKING%20GROWTH%20PROSPECTS%20 mum wage. The benefits also depend on the type of FINAL%20050423.pdf. investment (building, equipment, vehicles). See http://​ 18. According to the 2018 Product Market Regulation www.investsa.gov.za/wp-content/uploads/2021​ (PMR) indicators of the OECD calculated for more /03/PRINT-Incentives_compressed.pdf and https:// than 50 countries, South Africa’s regulatory frame- /wp-content/uploads/the-dti​ www.thedtic.gov.za​ works are more limiting to competition in key product -guide-2021.pdf. -incentive-schemes​ markets than those of most countries covered by the 25. In a regulatory sandbox, a financial sector regulator PMR data, including every OECD country and even allows small-scale testing of innovations by private peer countries such as Russia and Vietnam (https://​ firms in a controlled environment under the regula- data-explorer.oecd.org/vis?tenant=archive&df[ds]=​ tor’s supervision. DisseminateArchiveDMZ&df[id]=DF_PMR2018&df​ 26. Platinum and platinum-group metals are essential [ag]=OECD&dq=.&lom=LASTNPERIODS&lo=5&to[​ for hydrogen production, while chromium is used as TIME_PERIOD]=false). a catalyst in lithium-ion battery production. 19. h t t p s : // w w w . w o r l d b a n k . o r g /e n / r e s e a r c h​ sa.gov.za​ 27. See, for example, http://www.invest​ /wp- /brief/the-long-term-growth-model-fundamentals​ -Investment​ content/uploads/2023/05/South-Africa​ -extensions-and-applications. -Conference-2023_Case-Booklet_on. 20. They are often referred to as stars, superstars, ga- 28. World Bank, 2022, Country Climate and Development zelles, or unicorns. bank.org​ Report for South Africa, https://www.world​ 21. See A. Grover Goswami, D. Medvedev, and E. Olaf- /en/news/infographic/2022/11/01/south-africa​ sen, 2019, High-Growth Firms: Facts, Fiction, and Pol- -country-climate-and-development-report. icy Options for Emerging Economies, World Bank. 29. The cost of not transitioning to a green economy 22. International Monetary Fund, 2015, “The Level of can be large, as South Africa’s highly carbon-inten- Productivity in Traded and Non-Traded Sectors sive exports will be increasingly penalized by the for a Large Panel of Countries,” https://www.imf​ restrictions imposed by importing countries, such .org/en/Publications/WP/Issues/2016/12/31/The​ as the Carbon Border Adjustment Mechanism and -Level-of-Productivity-in-Traded-and-Non-Traded​ the Deforestation Act recently implemented by the -Sectors-for-a-Large-Panel-of-Countries-42750 . European Union. 23. South Africa (with a score of 0.034 on the OECD FDI 30. In other words, the objective is to incentivize new Regulatory Restrictiveness index) scores below the projects in the green economy by increasing their global average (0.10), placing it as one of the most expected rate of return by changing the relative competitive performers. (World Bank, 2024, “SADC prices between high- and low-carbon energy sourc- Investment Climate Scorecard”). See, for example, es rather than subsidizing particular projects. “Investing in South Africa,” https://www.thedtic.gov​ 31. For clarity, a SME is defined as a “separate and dis- .pdf. .za/wp-content/uploads/Investor-Roadmap-2020​ tinct business entity, together with its branches or Priority 4: Injecting dynamism into the private sector 17 ■ subsidiaries, if any, including cooperative enterpris- 34. Data from the South African Reserve Bank indicate es, managed by one owner, or more predominantly that the collective credit exposure of SMEs to banks carried on in any sector or subsector.” Specifically, in 2020 was R631 billion, constituting just 25% of the focus is on businesses with a turnover of less business loans facilitated by the banking sector. than R500  million ($22  million) per year and so in- Government programs provide R18 billion, which cludes a relatively wide range of businesses from amounts to 0.36 percent of GDP or 2.8 percent of very small (self or household entrepreneurs) to me- the total credit exposure to SMEs. dium size with several employees. 35. Department of Small Business Development, 2023, 32. http://www.dsbd.gov.za/programmes. “SMME and Cooperative Funding Policy 2023.” 33. For more details, see McKinsey, 2021, “How South 36. See J. Morisset, 2023, “To reduce South Afri- African SMEs can survive and thrive post COVID- ca’s unemployment, make work more attractive,” 19,” https://www.mckinsey.com/featured-insights​ Brookings. https://www.brookings.edu/articles/to- /middle-east-and-africa/how-south-african-smes​ - south-africas-unemployment-make-work- reduce​ -can-survive-and-thrive-post-covid-19. -attractive/. more​ ■ 18 Priority 4: Injecting dynamism into the private sector