Winter has come – here’s what South Africa should do about it

[Nat Quinn]

South Africa is facing a serious challenge. The European Union (EU), one of our main and most important trading partners, is moving towards making the so-called ‘transition to green energy’ a condition of trade.

South Africa desperately needs reliable and cheap power. Renewables cannot yet meet both the conditions of reliability and affordability, while something like coal can.

There are indications that the United States, another important trading partner, will also head in the same direction. That is all without the complication of geopolitics which seems to be making relations, including trade, more difficult in future. South Africa must develop a comprehensive strategy against this. Simply being a member of BRICS is not that strategy – it is more akin to a hope and a prayer.

This strategy should have many layers, including becoming truly neutral on the Russia-Ukraine War and demonstrating this, so that we can preserve relations with our Western partners as much as possible. We should also seek to expand our partnerships and sign free trade agreements with as many other countries as possible.  The best way to do this is to allow everyone else free access to our markets, as trade usually follows the principle of reciprocity.

Domestic reforms

But it does not end there. We also need domestic reforms so as to have maximum flexibility. We need a domestic economy that is flexible and resilient, and the only way to get there is to liberalise it. Out of necessity we should deregulate every part of the economy, most crucially labour. This will be required if we are to leverage our strong position of having comparatively more savings and more capital than almost any other African country.

South Africa can become an African manufacturing power, and we have a desperate need to reduce the 71.2% unemployment rate (using the expanded definition) among people aged between 15 and 24. These people are mostly unskilled, and since our education system shows no sign of improving and we cannot just throw away its products, we must allow low-paying manufacturing jobs to exist and absorb these young people. It will give them more purpose than a grant, keep them occupied, and help with security issues – a large contingent of military-age young people sitting around doing nothing and feeling hopeless is a major security risk for the country.

We need to cut red tape wherever it may be found, starting with energy. In some ways, our energy problems are simple; available supply cannot meet the demand for electricity. The long-term solution is liberalisation, getting more private suppliers of electricity, and giving them the right to generate electricity in whichever form they find convenient. In the meantime, we should be auctioning off Eskom power stations to private parties who could run them more efficiently.

Political goals

Eskom’s problem is that their main focus is not producing electricity, but rather meeting the government’s political goals. This cannot change for as long as the government is the owner of Eskom. Therefore, we need people whose focus is on making as much money as possible by selling as much electricity as possible to produce our power. But ownership on its own is not enough, we also need to get rid of the National Energy Regulator of South Africa – NERSA – and allow these private producers of electricity to set their own prices.

We can never match demand and supply without this crucial step. When demand outstrips supply then private providers in a competitive market must be able to raise prices which then reduces demand and allows supply to catch up, while incentivising more private parties to enter the market and therefore lower prices in future because of competition. Of course, electricity generation typically involves infrastructure that takes years to build, so entering the market is not an instant thing.

All of this most likely means that if we followed these steps now, it would mean significantly higher electricity prices than we currently have. But over a period of between two and five years these would start to come down.

Connected system

We should also start viewing the economy as the connected system that it is, so our labour, manufacturing, energy, and tax policies are all linked. To solve the energy crisis, we may need to swallow the bitter pill of even higher energy prices. But in a free market, the cure for high prices is high prices, because they incentivise new entrants and therefore lower prices due to competition.

Lower energy prices would be good for manufacturing, but we also need to absorb large numbers of unskilled/low-skilled unemployed in the manufacturing sector. We cannot do that by making it harder to hire these people through our labour policy. We won’t even get the investment necessary for new factories if our taxes reduce the disposable income available for savings and increase the cost of operating the factory.

Therefore, we need comprehensive reform along with a smart strategy to deal with the headwinds that South Africa is facing. Not only the geopolitical risks but also the risk of a global recession. We have to become a flexible, open economy that can adapt because the participants in the economy have the freedom to adapt. It is the only way to face what is becoming an increasingly difficult global environment.

 

source:Winter has come – here’s what South Africa should do about it – Daily Friend

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