History and the current austerity versus expansionist spending debate across the US, Western Europe and the developed nations of Northeast Asia hold several lessons applicable to the development of South Africa’s economy. The key lesson, it would appear, is that neither the National Development Plan nor a full employment model offers a one-stop solution. So why not focus on the best aspects of both plans and get on with the job? J BROOKS SPECTOR presents a four-point solution.
There is the old story – maybe it’s an apocryphal one, maybe not – it’s where a World Bank loan project evaluations specialist, standing on a large, nearby hill, looks out over a huge dam construction effort in progress. Together with the local project managers, the World Bank man watches a sea of workers as they carry loads of soil in baskets on their heads, up to the top of the works to construct this huge earthen dam.
After asking how much each of these people carrying the dirt earns in a day, and following some calculations of how much dirt they carry daily, he does some quick manipulations on his slide rule (yes, people actually used to use to use such things). After he jots down some figures, he turns to the local project managers. Triumphantly, he announces the construction of the entire dam could be completed in half the time, at about half the cost of it being done this way, if only the project managers would make use of a dozen large trucks and earth loaders. The project manager is quiet for a time, until he turns to the visiting expert and says, “Yes, that’s probably true, but what will I do with all these people working here? Where will they find work if I let them go? And how will they all feed their families if there is no work in this valley?”
In a nutshell, this, perhaps apocryphal, vignette embodies the increasingly acrimonious debate between advocates of the National Development Plan, or NDP as it is now near-universally known in South Africa, and proponents of sharply increased government spending and related measures (largely unions, the SA Communist Party and their allies) as a means to employ and empower the poor and the jobless. This is no abstract, theoretical debate. It has real consequences here. Simply – even brutally – put, it is largely the distinction between promoting economic growth and pushing growth in employment.
On the one hand, boiled down to essentials, the NDP and its advocates argue the key to the goal of “a better life for all” must be efforts to expand the GDP through increases in economic output – goods, services, and other income flows. In connection with that, the right policies can ensure wealth trickle-down will actually occur that will make it possible for the nation’s wealth to increase and the country’s Gini index of income inequality to decrease over time. Moreover, with just the right mix of policies (and a bit of luck), the government can ensure a growth in the population’s skills repertoire will occur and that economic activity will move up the value chain from digging things up to making the minerals into move valuable things. The goal, here, is both to chivvy and encourage the economy to become an engine of growth and job creation – figuring out and then using just the right mix of carrots and sticks to make things come out for the better, for all.
By contrast, the pro-employment/pro-income first faction argues that a – or perhaps “the” – key purpose of government must be to generate income opportunities for the maximum number of poor and mostly un- or under-employed people. Then it must provide alternative incomes when the economy doesn’t succeed in generating sufficient jobs, and ensure that policy measures are vigorously redistributionist to achieve these purposes. And once a job is gained, it must be held onto and preserved, regardless of larger, changing macro-economic circumstances.
There are obvious international parallels and precedents to this South African debate. Historically, for example, like many industrialised nations, both pre-World War II Germany and the US adopted versions of Keynesian economics – pump priming, deficit spending and infrastructure funding, or counter-cyclical budgeting. All of this was a series of experiments trying desperately to put income in the pockets of the unemployed, almost regardless of the short-term budgetary consequences and virtually without regard for whether these jobs were jobs for the future with high technological requirements or pure pick and shovel work.
The whole point was income in pockets, and income that would support demand for goods and services – thereby pushing the economy into an upward trajectory until growth was assured. (Many economists argue, however, that the real impetus to sustained growth in the US came from the massive government spending in production and research crucial to the war effort.)
This question, of course, is also currently at the heart of the austerity versus expansionist spending debate across the US, Western Europe and the developed nations of Northeast Asia – all in response to the long-term impact of the global economic slowdown, post-2008. Despite the well-understood dangers of massive expansionist policies, proposed plans in a number of countries include new waves of public spending paid by deficit spending, enhanced social welfare expenditures, new public works projects and virtually zero-interest lending.
The opposite – austerity policies – are being advocated or put into place, trimming the “fat” from government spending by eliminating less than crucial government programmes, cutting entitlements spending, selling state assets, and improving tax collections, closing tax loopholes and avoidance and dramatically increasing tax rates. In recent weeks, in fact, this debate broke out in academic economics in a remarkable way. Two of the field’s leading theorists, Carmen Reinhart and Kenneth Rogoff, argued that increasing debt beyond certain levels would inevitably cause a slow-down of economic growth. Their line of argument had initially become a key bolster for the austerity side of the government economic policy debate – except for the fact, as is now well-known, that their elegantly phrased case was found to have both conceptual and database holes in it. This has thrown the expansionism/austerity debate into dispute all over again.
However, the major effect of technology on this debate has been obscured or effectively overlooked by far too many. Proponents of the NDP version of policy like to point to the history of developmental states like Japan – but at the risk of a misreading of history. Following 1868, the year of the Meiji Restoration and the end of the isolationist shogunate, the Japanese government rigorously managed the allocation of scarce capital to the most promising technologies, effectively forcing old, established family firms to move to new products, and for new firms to begin production. Additionally, scarce government capital was expended on the build-up of the country’s military under the slogan: “Enrich the country, strengthen the military”.
Meanwhile, labour unions were rigorously suppressed and forced savings regimens kept the consumer benefits of industrialisation beyond the reach of many, effectively keeping living standards low. Moreover, the tax regime and rural poverty drove more and more peasants into the urban areas and the urban labour pool, keeping wages low. Finally, and crucially, there was, however, a major, concerted national push to educate the nation to the best possible level, emphasising technological competence and engineering skills so businesses could take maximum advantage of new technologies; for example, moving out of textile production and into motor vehicles. While the post-World War II recovery and expansion was different in some ways, in its early stages, it followed many of the same patterns as before. In particular, capital (especially foreign exchange) was allocated carefully by a well-trained, well-motivated bureaucracy – these administrators tried hard to pick winners and eschew losers.
Effectively, South Korea and the other “Little Dragons of Asia” – as well as, more recently, the People’s Republic of China – have followed the same pattern, more or less. What has happened to all of them, however, is that as wages eventually have risen, the pressure to offshore those jobs and consequent production has also grown appreciably. In the case of China, production has shifted from the coastal higher wage regions to the vast reservoir of interior cities and provinces that still have lower wage rates. Now the pressure is on to dispatch the lowest end of the production chain to even lower wage places like Myanmar, Sri Lanka, Vietnam and Bangladesh. Africa’s probably next.
For South Africa, now, the proponents of the NDP have been forceful in marketing beneficiation as a key to national economic growth and a process that will be crucial to encouraging new job formation. In essence, beneficiation means moving up the production value chain – from platinum mining to platinum refining. Then it is on to production of pure ingots and then to jewellery making and the production of other industrial products.
The problem, of course, is that it is an interconnected world economically. The current makers of such products elsewhere aren’t standing still; they are moving hard to cut costs as well. They have more experience at it than South Africa does and they already have the manufacturing networks to take advantage of production processes and marketing. If that is the case, then perhaps South Africa’s better opportunity to generate economic growth and job creation is to concentrate on wherever it still has a comparative advantage. And that still seems to be the mining sector, some agriculture and in tourism.
The problem is that jobs in those sectors are the ones least likely to be high-tech positions; or, if they are, the number of jobs actually will decrease, which can be a real trap. To follow the example of Japan and the rest of Asia would be to focus on deferring consumption, tamping down labour demands, enforcing savings and mercilessly forcing inefficient producers to change their production spots, to change their product lines or run the risk of becoming historical roadkill (and thus job losses). Those are not the social and political prescriptions the proponents of the NDP would like to be making here in today’s political and social climate. On the other hand, the jobs-first advocates presumably insist upon the protection of all jobs regardless of whatever industry they are in, the creation of more jobs in protected industries and the insistence on supporting sunset industries so as to protect still other jobs.
Is there a way out of this dilemma? If Rogoff and Reinhart are correct after all, then a country like South Africa with its already high levels of national debt, stubborn unemployment, declining competitiveness, often untrained and underproductive labour force, and increasingly rigid labour markets has increasingly few options – save for a race to the bottom for low skilled jobs hived off from a more competitive Asia. But if they are even partially wrong, that means there is still some slack in the system for more government spending. But the big question then becomes: for what?
To take the actual Asian developmental state trajectory historically, rather than some theoretical, abstract model of a perfect government perfectly allocating resources to grow the economy properly, and taking into account the real and growing impact of technology, it seems to this writer at least that a fourfold approach – and a peace pact between the competing economic models – is called for urgently. This approach would be a synthesis of the two competing models now being advocated in South Africa – and it could even be a way out of the current political and economic policy impasse.
The first element of this effort would be a sustained, concerted drive to move the education system to a new level of efficiency so that it truly imparts the skills needed for the new economy to all South Africans. Sadly, maybe it is too late for many adults who were shabbily treated by both by the Apartheid-era educational system and the first generation of South African, post-1994 education. But, a system that still keeps the vast majority of students without mathematics and language skills and without experience in a functioning science lab, a library and the Internet will be beaten by dozens of other more agile and forceful nations. There is no time left.
Second, government must begin providing serious incentives for technologically advanced industries – especially those that take advantage of the country’s natural endowment. Where, for example, are the major governmental programmes to support solar powered energy technology that could be manufactured in large amounts and successfully exported to other nations – in place of the major subsidies now for petrol-fuelled motor vehicles? Or, what about a major national endeavour to make real, value-added tourism the focus of real investment in cost-effective tourism, rather than just large numbers of Southern African traders on shopping expeditions – the natural endowment is already there, after all?
Third, labour markets need to be opened up so that employees can move easily to new sunrise industries and enterprises, rather than feel the need to protect their current jobs at all cost. Concurrently, tax incentives need to be instituted so that capital, now frozen in place because of hesitations over future earnings possibilities, can be put to use in the country. (By contrast, in the 19th century, or even the early days of Chinese growth, countries frequently were trying to grow in capital-scarce circumstances – something very different from today’s global financial markets.)
Fourth, given the real need to get income into the hands of the poor, there needs to be a national programme that puts everyone to work doing low-skilled, useful work. Good models exist from the Great Depression – such as American examples like the Civilian Conservation Corps that put many thousands of unemployed young workers to clearing and upgrading a multitude of roads, parks and other natural spaces. This country’s infrastructure is in great need of everything from painting and cleaning to rebuilding and repairing roads.
It is not enough to say the infrastructure spending is already coming along, precisely because so much of that spending will end up going into the procurement of needed but imported heavy equipment. For social and political reasons, the real need, now, is to spend money to put a great many people to work. Tie that together with the Brazilian system that prevents providing social grant payments unless children go to school and that the able-bodied are available for work and it seems clear there will be a huge body of the able to do the meaningful, even if it is still hard, physical work that needs to be done.
That’s the four-point plan. The real key, however, is to end the political squabble over whether it is the National Development Plan or a full employment model that will be the country’s salvation – and to get on with the job. DM
Photo: Workers take part in a march in the city of Johannesburg July 4, 2011. REUTERS/Siphiwe Sibeko
"I know of a cure for everything: salt water...in one way or the other. Sweat or tears or the salt sea." ~ Karen Blixen