South Africa

A hole at the centre of the NDP

By J Brooks Spector 7 August 2013

Beyond any controversy over whether or not Khanyi Dhlomo should have received so much government financing for her new venture, the national discussion over the use of government expenditures for this kind of enterprise can also stand in for the larger national debate over South Africa’s economic future, its National Development Plan and the way the country’s capital stock is put to its most productive uses. J. BROOKS SPECTOR contemplates this big question.

The other day Luminance, a lushly appointed, luxury department store, had its grand opening in the seriously upmarket Hyde Park shopping centre in one of Johannesburg’s ritzier suburbs. For readers who have managed to miss this particular event, Luminance has been a major news story over the past several weeks in South Africa. This is due to three things: the high profile nature of its principal developer, Khanyi Dhlomo; the fact of its R35 million worth of financing granted from South Africa’s National Empowerment Fund (NEF); and the extraordinarily pricey array of the (mostly foreign, mostly imported) goods on offer.

Luminance co-owner Khanyi Dhlomo is a genuine South African celebrity. She has gone from being a stylish model and one of South Africa’s first black news-readers on national television to becoming a media mogul developing titles that captured the “new” nation’s imagination. (It probably didn’t hurt that she had a father who played an important political role during the transition from Apartheid, but nobody really believes her very real accomplishments came as gifts from others.) A Harvard business education and other significant international experience seems to have collectively given her just the right nouseand clout – to launch an ambitious new venture in an uncertain economic climate, and to obtain the government financing needed to make it all come together so nicely. But was this the right kind of investment decision for a government such as South Africa’s? Keep that thought in mind for a minute or two.

Over the past several years, South Africa’s government has been wrestling with the implementation of its new National Development Plan (NDP), a plan that, in part, would deal comprehensively with how the country and the government invests for the future. The NDP replaces a whole alphabet soup of previous plans that meant well, but ultimately haven’t managed to deliver the goods. The NDP was crafted under the tutelage of planning minister Trevor Manuel, businessman and now-ANC Deputy President Cyril Ramaphosa, and former mining executive Bobby Godsell, along with a staff of experts. The process included a broad consultative process and then road shows to convince the waverers about the need for, and appropriateness of this plan. Some remain unconvinced, including people within the ruling institutional triumvirate of the ANC, the SACP and Cosatu.

At the heart of the NDP is the idea that, beyond growth, the plan will also lead to a more equitable society with less waste of human potential. As part of its multiplicity of goals, thoroughly carried out the NDP would reduce poverty, increase the nation’s wealth and improve the income shares of those lowest on the income scale. It would encourage business investment and the creation of new jobs. It would improve overall living standards. It would modernize and increase the efficiency and capability of government. And it would take steps to improve health, education and social welfare. In addition, it would lead to vast investment in the nation’s infrastructure that, in turn, would trigger growth in demand for the products of an industrial revival.

But the fact remains that even as the NDP has been announced as definitive national government policy, with the government effectively arguing that “the time for debate about the plan is past, it is time to get behind it”, the NDP is papering over an as yet unsettled debate about what policies are best for the rescue of the South African economy.

The need for something is clear, and the country is facing some serious economic challenges. At least a quarter of the working age population looking for work has been unable to find any. Unemployment among young South Africans under the age of 35 is estimated to be at least 50%, and among black youth it is higher still. The country’s de-industrialization continues apace, shedding jobs. The mining industry (a relatively small share of the overall national domestic product, but a much larger proportion of the nation’s export earnings) suffers both from serious labour troubles and output slippage in comparison with other international competitors. Meanwhile, the country continues to face major difficulties in providing quality education, health, policing and criminal justice.

In the face of all this there is wide agreement South Africa’s economy is heading into some increasingly troubled waters. The problem, of course, is that while virtually everyone has a solution or two, many of these are mutually contradictory. Consequently, it is this “what is to be done” question that is the hard part. As a result, beyond the NDP, another competing model is effectively being advocated as well.

The NDP is an attempt by the government to address South Africa’s fundamental economic challenges through a plan that will gain broader consensus support as it builds detail and draws in supporters of this or that element of the overall plan. Now that the NDP has become official government gospel, however, it papers over a fundamental split in economic ideas, a split that effectively mirrors a larger social and political split.

On the one side of this divide is the argument South Africa’s biggest problem is pervasive unemployment and the wave of unemployed youth that continues to grow as each age cohort leaves school and tries to enter the workforce. With economic growth stumbling along at around 2% or less, the economy continues to shed thousands of full-time jobs, and creates far fewer than 300,000 new ones per year. This is in stark contrast to the earlier government promises to create 5 million new jobs within the decade.

Given all this, the imperative of job creation would seem stunningly self-evident. With evidence like this in mind, analysts such as the authors of the report “Africa at work: Job creation and inclusive growth”, published last year by the McKinsey Global Institute, have argued for a primary economic strategy in African nations that will place massive attention to formal job creation at the top of the economic policy agenda for Africa.

Proponents of this approach are arguing, in effect, that directing the state’s resources and the economy’s capital into nurturing job creation eventually releases a tide of demand for goods and services that becomes a self-perpetuating, virtuous circle that generates new businesses to service all that newly released demand. Similarly, it helps cash crop agriculture too by building demand for increased, better and more varied food commodities.

By contrast, the failure to aggressively head down a job creation path will almost inevitably lead to providing the right mix for a social meltdown as the “Wretched of the Earth” rise up to seize what they believe to be their due. In this country, especially, these harsh economic realities will eventually collide with the now-familiar political promises of the new South Africa in a very problematic crash.

Politicians advocating such aggressive job policies are usually effectively proposing redistributionist and nationalizing policies as well. Redistributionist policies to get money (and jobs) into the hands of the poor, and then, almost inevitably, nationalizing policies to get hold of sufficient resources so as to be able to carry out their first goal. The problem with this approach is that eventually growth slows even further as inefficient enterprises consume ever-greater subsidies or price supports, or they collapse entirely at yet another significant cost to the state. Or perhaps the government eventually just gives up on the project after having marshalled huge numbers of people into such efforts. Look up an example of one such an effort in the file marked “China’s Great Leap Forward” and its aftermath for the cautionary tale.

Taking an essentially opposite approach are advocates of a great national effort at an infrastructure build or rebuild. At the heart of this approach is the argument that the key for economic growth for a country like South Africa is a massive effort to get railroads, harbours, electrical grids, IT connectivity and mining zones up to world standards so the country’s export-led growth can be maximized once again. This is the rationale for the vast infrastructure investment plan being rolled out across the country.

In a place like South Africa, this strategy argues either for relying upon improving primary commodity production, or dramatically increasing industrial production so that it makes gains from its comparative advantage on the basis of low wages relative to other places. The problem with such an approach is that it is a rare politician who can argue for economic growth through meagre wages and long hours in the equivalent of old-style East and Southeast Asian sweatshops, or rigorous restrictions on the wages of the currently employed.

In the case of South Africa’s NDP, a third approach is also being advocated. The advocacy for the adoption of new technologies, green technologies and other niche markets that can make innovative, higher-up-the-value-chain use of the country’s primary commodities – the so-called “beneficiation” strategy.

The problem with any of these approaches politically is that they advocate vast capital investments in infrastructure, or serious efforts to rein in wage demands by the currently employed, or both. But none of these approaches promises to support the massive job increases politically necessary to address the national social pressure that continues to build.

And so now it is time to return to the arrival of Luminance on the scene. If press reports are correct that some 35 million rand have been invested in this venture and around forty or fifty jobs have been created, that would mean the cost of creating each job in that company has come in at nearly a million rand per job. Moreover, most of these jobs are actually dependent on the importation of expensive designer frocks and accessories that are to be sold to the rich.

Effectively, it can be argued the NEF’s investment in Luminance is the functional equivalent of a massive infrastructure purchasing and building program that aims to improve the lifestyles of the rich, the famous and the would-be rich. Luminance will most probably make some serious money for its owners and investors along the way – and it will allow them to repay the NEF’s loan on time.

And stocking Luminance’s racks and shelves will create large numbers of yet more jobs, but these will come primarily in Paris, New York and Hong Kong, and wherever those designer frocks are stitched together, rather than in Cape Town or Johannesburg where the textile and clothing industry has already been decimated by the nation’s import policies.

As a result, this has echoes of the way the country’s infrastructure program will create jobs; they will come, for the most part, to the heavy industrial manufacturing centres of Europe, East Asia and America and not, at first, to South Africa, because so much of this infrastructure building will be dependent on imported high technology and specialty items, rather than equipment manufactured in South Africa.

And so, fundamentally, one development choice calls for spending pots of money to create jobs, regardless of their skills levels. This is on the theory such spending will eventually build demand for consumer goods that will then add heft to the nation’s productive capacity. The other choice argues for spending money on expensive infrastructure, even if the real local jobs payoff is years away. But neither of these two choices seems the basic answer to the problem.

Is there a third fundamental choice? While China’s development model of national capital mobilization for an export-driven economic engine has captured the imaginations of many South African policy makers, and the country’s public as well, the real secret of East Asia’s economic growth should be searched for in places beyond decisions made about capital allocation. The spotlight should really fall on how Japan, then the Four Little Asian Tigers (Singapore, Taiwan, Hong Kong and South Korea), and now more recently Thailand, China and even Indonesia, have mobilized their energies to build a well-educated, increasingly skilled labour force; one capable of taking on the better-paying jobs in their increasingly industrialized, high-tech economies.

Traditionally, economists have taught that there are three fundamental elements in an economy: land, labour and capital. Capital still means capital, of course, whether it is domestic or foreign. Land, however, actually means the space it occupies as well as its mineral resources and agricultural potential. And labour no longer is simply the hands needed to push a plough or tend an assembly line. Rather, it increasingly means the skills and educational capabilities capable of transforming resources into value-added products with the right infusions of capital.

Neither Japan nor Korea (nor Taiwan, Hong Kong or Singapore) ever had much historically in the way of land and resources; increasingly skilled labour was their key. And although capital was scarce for years, it is no longer a serious question in most places – the world is awash in capital waiting to be put to profitable use as investment.

And so at the heart of this approach is a massive investment in improving the quality of the nation’s education, indeed, giving it pride of place as the single most important investment a nation can make. (Yes, it is in the NDP and the “jobs for all” crew’s proposal as well, but it is just one of many ideas in both.) Rather than dumbing down the test-passing threshold for political gain there needs to be a kind of Marshall Plan for South Africa’s education system so that investors – foreign and domestic – are convinced the work force is gearing up for the challenges of the world’s most technologically advanced jobs. This will have to come with policy-makers enforcing the kind of governmental, business and labour discipline that earns the country a reputation as a place where industries can be profitable and productive again. The model is there, but it requires the political will to put it into place – to fill that hole in the donut of national development. Education must be the central core of every part of the NDP if it is going to develop a nation.

It will require government to hold the education sector to account in terms of quality of output; it must insist upon a national process of serious training for the jobs of the future; and it must demand that spending on education be targeted to address the horrific inequities in South Africa’s educational system. This means ensuring every school in the country has the textbooks, libraries, laboratories and IT connectivity (let alone plumbing and electricity) crucial for learning, rather than the current state where more than 90% of schools are lacking a well-stocked library or lab. It also requires the teachers be dedicated, skilled and supervised to ensure they deliver an education that will underpin a 21st century economy, rather than the one that outfitted H.F. Verwoerd’s nightmare vision of a country where the majority were trained only to be “hewers of wood and drawers of water”. But time is short and the competition is gaining ground everywhere.

Absent a national commitment to make South Africa a well-trained, well-educated nation capable of taking on the tasks of this century’s economic challenges, the nation will only be able to pick up the crumbs. It will be left trying to find ways to pay for low skilled jobs suitable for an undereducated workforce, or continuing to import technology in an equally desperate race to rebuild the country’s infrastructure in the hopes investors will take a chance on the country’s recovery.

And as for the NDP, as things stand now, yes, the government budget lines will get their NDP-aligned labels and performance indicators. But until education takes its prime position in this effort, the results will most likely fail to meet the hopes of its proponents in transforming society. And the the calls and pressures for jobs at almost any cost will continue to grow, fueling populist pressures for a very different approach. DM

Photo: Children write notes from a makeshift black board at a school in Mwezeni village in South Africa’s Eastern Cape Province in this picture taken June 5, 2012. REUTERS/Ryan Gray

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