Our economy is barely avoiding recession (perhaps it isn’t) and our existing borrowings and a declining credit rating, just a notch above junk status, means that the government has no more fiscal scope to spend its way out. What is also clear is that the type of government established by our Constitution is an expensive one to run. The only way out of our long term hole is to grow the economy, but our economy cannot grow unless big changes are made. And if we do not make changes ourselves, our creditors will impose them on us. By DIRK DE VOS.
One of Winston Churchill’s many good quips was “Never let a good crisis go to waste” is now something all South Africans could take heart from. It is now widely accepted that we just can’t go on like we have been.
Our economy is barely avoiding recession (perhaps it isn’t) and our existing borrowings and a declining credit rating, just a notch above junk status, means that the government has no more fiscal scope to spend its way out and monetary policy, not really in our own hands, especially after the dramatic fall in the Rand, is about as accommodative as possible. Junk status beckons and if (or when) that occurs, it will both push our government’s finances over the edge, and put our very sovereignty into the hands of others.
That we have continued for so long without a major mishap before now has been more the result of a commodity boom driven by China’s economy. China and other emerging Asian countries’ flood of exports has allowed the world to keep a lid on inflation even as our industrial base has eroded away. Our economic growth, such as it has been, is consumption-lead, not production-lead. This means that we cannot grow. A deeper analysis of what is wrong with our economy, even before the global commodity slump, was undertaken by Ricardo Hausmann. It is worth a read. More recently, Martin Wolf of the Financial Times showed us just how bad our economy has performed.
Our own more recent home-grown efforts to understand matters, the National Development Plan makes many of the same points. South Africa, being South Africa though, has all sorts of other policies, creating what is known as policy gridlock. Global economic conditions have now turned against us. Capital is hotfooting it out of all emerging markets at an alarming rate and South Africa is especially exposed. In the meanwhile, our racially divided legacy and its continuing impact means that we seem less unified than at anytime since 1994. Why would it be otherwise? South Africa has some of the highest levels of inequality in the world along with some of the highest levels of unemployment anywhere. In South Africa being poor and jobless has a race and it is the black majority of our people.
The search for scapegoats for our present predicament is well underway. One emerging theme punted by many who were too young to remember is an indulgent revisionism; that the ’94 settlement and the negotiated constitution was some kind of sell-out that left economic power in the hands of the ungrateful minority. That this theme is also punted by those who should know better is tragic, really. The whole idea should be rejected out of hand. That is not to say that the Constitution with its various guarantees is not part of the story. It’s just that its part is misunderstood. Stepping back from the details of each clause for a moment, one could ask: what type of constitution is it? How does it compare with other constitutions? Not the specifics, or your favourite parts, but the scheme of it as a whole?
Well, it is detailed document and, correctly, one of the most “progressive” constitutions anywhere. The Bill of Rights applies vertically (between government and its citizens), but also horizontally (between people). The rights set out are not just first generation rights but second generation rights (socio-economic) and indeed, third generations rights. It also explicitly provides for corrective action and even the property clause, as the Constitutional Court ruled in Agri South Africa v Minister for Minerals and Energy 2013 4 SA 1 (CC) present insurmountable problems to expropriation of property. The structure of how we are governed, spheres of government is set out in considerable detail. Our constitution is not a neo-liberal charter by any means. Quite the opposite.
So how might the Constitution or the ‘94 settlement have prevented economic transformation? The Constitution, in its progressive orientation, assumes or describes a large, sophisticated and capable state actively involved in the achievement of greater equality. The level of capability demanded is, as we see, quite beyond what our present government is capable of doing. John Matisonn describes the hollowing out of capacity rather well. The initial high standards of governance we set ourselves are still there. But perhaps they were not the standards appropriate to the country we actually are. Look at the requirement of clean audits. Even in those parts of government that, technically, perform better than the rest, clean audit requirements can lead to undesirable and unintended outcomes. For vast swathes of the government, clean audit requirements are honoured only in their breach.
What is clear is that the type of government established by our Constitution is an expensive one to run. As is the case in every single government ever, the main source of funding is via taxes. Tax is not only required to run the state itself, but also to redistribute income. So, while South Africa has the highest levels of income inequality pre-tax, it is also, compared to its peers, one of the most redistributive tax systems around. Consider this: Nigeria, which is in the process of trying to pass its own budget for 2016, has an economy that is 64% bigger than South Africa’s in US dollar terms, yet its federal budget, again in dollar terms, is just half of South Africa’s national government budget. This presents a problem. Our tax base is unusually narrow. SARS does some great work every year in showing us how it all works. There are four main categories of taxable income. Income taxes off salaries generate 35,9% of all taxes; VAT is next with 26.9%, Companies Tax at 18.9%; then the rest like fuel taxes, customs and others make up the balance of 18.7%. There are only five million taxpayers that pay any income tax, but the top 566,000 of these taxpayers, those earning over R500,000 per annum, were responsible for more than 50% of all income tax. It would be fair to say that big whack of the Companies Tax portion was paid by (or rather on behalf of) share-owning individuals, also the wealthiest taxpayers. That the tax base looks like it does is obviously a result of our Apartheid history of oppression and exclusion, but it also makes economic transformation, while continuing to support an expensive state sector, a very tricky task. It also explains why the National Treasury sits firmly at the centre of the state machinery, more so than in other countries.
What we have is an untransformed economic structure inherited from our ugly past in a clinch with a government representing the majority impatient for profound change. Economic freedom, if you will. But the same constituency has also become dependent on the state’s redistributive function. This is not just about social grants, health care and other subsidies, but in the employment of a huge number of civil servants whose increasing number and wage increases has not discernibly increased the ability of the state to better deliver on the redistributive function of those not employed by government.
Had the government delivered quality education, a transition in the structure of our economy would have been well underway. The teacher’s union SATDU is rightly catching flack right now, but our policy and administration has been almost as bad as SADTU. Let’s be fair, SADTU did not close the teacher training colleges, or the technical training colleges, neither did they sack all those experienced teachers in the 1990s. Nor did SADTU forget to deliver textbooks or appoint provincial MECs without a clue.
We should not say that we are not a very different country from where we were, but the overall scheme put in place by Apartheid is still in place. It was described brilliantly by Hans Pienaar just a few years back, and he explains how Apartheid’s policies live on by referring to a slogan attributed to Hendrik Verwoerd: “Capitalism for whites, Socialism for blacks”. His analysis also explains why efforts at transforming the economy, Black Economic Empowerment is an elite project that does not transform the structure of an unequal economy, but rather changes the racial complexion at the top. Recent declarations to create 100 black industrialists is merely more of the same.
Pienaar goes on to say, “As long as the globally centred capitalist core (of the South Africa economy) remains to fund it all, this dispensation can continue for some years to come.” Well, that was three years ago, and our globally centred capitalist core is on its knees. The only way out is to grow the economy, but our economy cannot grow unless big changes are made.
And if we do not make changes ourselves, our creditors will impose them on us.
The seriousness of our situation may be hitting home. Former President Kgalema Motlanthe is back heading a team to review post 1994 legislation that has the “unintended consequence” of preventing transformation of the economy. He will have a huge task – there is just so much of that type of legislation clogging the system. Maybe his team is looking for ideas. Well, here is one proposal: Dump the whole B-BBEE edifice created under the Department of Trade and Industry. It is overly complex and with the new codes, it has got much worse. It abounds with all sorts of unintended consequences. In its place, expand our first BEE programme, the one run by Treasury under the Preferential Procurement Policy Procurement Act (PPPFA) to the private sector, and simplify that as well. The PPPFA weights procurement from BEE compliant firms using and 80/20 for smaller items and 90/10 for bigger ones. Fully BEE compliant firms have a 20% advantage on price over non-compliant ones or smaller items and 10% for bigger ones.
Simplify, what it means to be a black business as well. Instead of those arduous codes of good practice, define a black business as one which is majority black-owned and managed. (Disclosure, I advise and charge fees on the current BEE codes) To expand its application to the private sector, amend the Income Tax Act to allow, say, 10%-20% of all payments made to black businesses to be deducted from the total taxable amount of any taxpayer. If the discount to black businesses loses too much tax, then do the opposite, allow only, say 95%, of the deductible expense if spent with a business that is not black (as defined).
I concede, this proposal is far from perfect, and will be open to abuse. But it does not have to be perfect, it only has to be better than what we have now; a much, much lower hurdle.
There are many other parts of the law book that need attention to open the way to building an inclusive and productive economy. We know that there is a very strong correlation between rising labour productivity and economic growth and unfortunately, as Professor Hausmann shows, productivity growth in South Africa is poor. Improvements are largely a result of substituting capital for labour. Many of the sectors of our economy need to be exposed to more competition. Too many sectors, particularly state-owned enterprises are protected from competition on the basis of some “national interest/developmental” objective or on the basis of “social justice” or some attachment to public ownership. Licensed sectors like telecoms or broadcasting are also overly protected from competition. Let’s stop that. It merely fuels rent-seeking, and as we see, where these protective tendencies are the strongest, productivity levels are at there weakest.
Karl Marx once wrote that “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past”. Let’s not fool ourselves that getting out of the rut that we find ourselves won’t be easy. History has landed us in circumstances not self-selected. But it is what it is. Our only way out is through inclusive economic growth. There is just no other way. DM