There is general consensus among all economic commentators and stakeholders that the South African economy is in dire need of a major overhaul. South Africa remains locked in a low-growth, path-dependent economic trajectory that is currently deepening social inequality and highly concentrated ownership patterns. There can be no denying that the economy needs to be radically transformed, which requires us to think afresh on the roles of institutions in economic governance and resource allocation. By MCEBISI JONAS.
While I think most of us could agree that institutions are critical for economic prosperity, at the same time I think we should be sceptical of “grand theories” and general perspectives on this subject. Ruchir Sharma (2016) in his book Rise and Fall of Nations: Forces of Change in the Post-Crisis World makes the important point that institutions themselves reflect the economic structure of the country.
Where wealth is created primarily through innovation and productivity gains, societies tend to have strong and enduring institutions.
Where wealth is created primarily through rent-seeking, institutions will always be under threat.
This presents something of “a chicken and the egg” paradox – inclusive institutions are required to restructure an economy towards more shared and sustained prosperity, but elite interests controlling rents actively prevent the necessary innovation and institutional change.
Also very relevant to South Africa is a recent book by Francis Fukuyama called Political Order and Political Decay. Fukuyama argues that modern and successful polities have a balance of three sets of institutions: the state executive bureaucracy, the rule of law and systems of democratic accountability. And he argues that all these institutions are subject to decay and corruption and require constant and vigilant renewal.
In South Africa’s case, while our legal and democratic systems still display signs of life and functionality, our state executive institutions show strong signs of weakness and corrupt capture. Indeed we continually observe the integrity of state institutions being compromised for short-term political expediency. Moreover, it seems that some in influential leadership positions seem to accept this institutional decay, even encouraging it, and do not understand the importance of healthy institutions for driving any sort of inclusive growth agenda.
So far, our key economic institutions of National Treasury and South African Reserve Bank have remained centres of excellence in a sea of institutional decay and mediocrity. But imagine the economic damage if this ceased to be the case.
The problem with “grand theories”, and what I would call overly ideological policy prescripts, is that they do not do justice to the complexity of the relationship between institutions and economic development, which necessarily varies over time and particular circumstances. Similarly, as tempting as it may be, we cannot simply copy what has worked elsewhere in the world, without fully appreciating the enabling conditions which allowed institutions and economies in particular contexts to flourish.
Singapore – which is currently in our news following the visit of one of our provincial premiers – is a case in point. Singapore has a highly effective working model of state capitalism, which debunks the global standard view that fully privatised enterprises are more efficient than state-owned companies. Isabel Sim (2011), in her analysis of Singapore’s Government-Linked Companies (GLCs), shows how Singapore’s GLCs perform better and more efficiently than private companies.
She attributes this to four success factors. First, the GLCs operate with a very strong corporate governance culture, which limits short-term political interference. Second, the GLCs operate within a zero-tolerance corruption environment, with Transparency International ranking Singapore as one of the least corrupt economies globally. Third, the GLCs are meritocratic and are characterised by high levels of technical capacity and professionalism. Fourth, there is a primary focus on bottom-line performance and competitiveness.
I’m sure, all would agree, a very different context to what pertains back home.
Nationalisation in a context of entrenched corruption, weak corporate governance, patronage rather than meritocratic appointments, and disdain for the bottom line (if our existing state companies are anything to go by) will not deliver improved outcomes with respect to employment, poverty reduction and reduced inequality.
There are countless examples from Latin America and Asia that outline the economic dangers and consequences of widespread nationalisation without the requisite state capacity and integrity. Unfortunately, it is the poor who suffer most. Losses incurred by inefficient state companies always result in fewer resources available for other pro-poor and anti-inequality fiscal expenditure.
It would be a major failure of our political system (and tragic) if SA continues to follow a self-destructive path to radical economic ruin. The so-called Venezuelan option would not amount to “creative destruction” as some advocates would have us believe, but would perhaps be more similar to the 19th century cattle killings which greatly impoverished the mighty Xhosa nation for decades thereafter.
In this year’s SONA President Jacob Zuma defined Radical Economic Transformation as “fundamental change in the structure, systems, institutions and patterns of ownership, management and control of the economy in favour of all South Africans, especially the poor, the majority of whom are African and female.”
While there is nothing fundamentally wrong with this definition, it is simply pitched at too general or abstract a level. Here I wish to define RET as a progressive structural change in the fundamental features of SA’s political economy. And to make sense of that statement we need to have broad agreement on the “fundamental features” that need to be progressively changed.
I am hoping that by now the following list of eight features, and the required changes to them, could be regarded as uncontroversial “conventional wisdom”, broadly agreed (or commanding “sufficient consensus”) both within the ruling party and in broader society:
1. SA has a seriously underperforming mixed economy, or “really existing capitalist democracy”. Property rights are protected by the Constitution and the ruling party supports a mixed economy of the social democratic variety.
- As a result of the colonial/apartheid legacy SA suffers extreme inequality, particularly along racial lines. The statistics are quite well known, but remain staggering, and bear repeating.SA is quite a rich country. In 2016 we had a GDP of R4.4-trillion at current prices, and had 16.9-million households. So if our GDP were to be equally distributed among all households then each household would receive about R260,000 per year or R22,000 per month. Allowing 30% of GDP for fixed investment and 20% for the provision of public goods would still leave each household with R11,000 per month. About 20% of households earn less than 10% of this amount, and about two-thirds of all households earn less than half of this. Only 8% of black African households have monthly expenditure of more than R10,000, while 63% of white households do. Also, the wealthiest 10% of the population own 90-95% of all wealth. (With figures like these it is not surprising that many of our people cannot see beyond the “skin thing”.)All this needs to change, but how (critical condition), without jeopardising increasing private and public fixed investment?
- SA is only partially industrialised and we have exceptionally high unemployment rates and low labour market participation rates by international standards. Essentially, we have accumulated insufficient capital to employ all our people. Present rates of private investment are not much larger than depreciation. This again points to the need to increase rates of real investment in our country, both public and private.
- Our private sector is dominated by large-scale capital and capital-intensive industries. This reflects a global and historical tendency of capitalism towards the concentration and centralisation of capital. But by international standards we have unusually low contributions of SMEs to economic activity, and low new business start-up rates and entrepreneurship rates. We need to change this, while continuing to guard against the illegal collusive market behaviour of the dominant players.
- The SA economy is completely integrated into the global economy, both through international trade, capital flows and ownership. We remain dependent on minerals-based exports. This must change. We must grow our export industries. As regards foreign capital it is noted that for the first time ever in 2015 South African foreign assets exceeded foreign liabilities (R5.5-trillion liabilities compared to R6.2-trillion assets). Our foreign liabilities are mainly portfolio investment (R2.6-trillion) and direct investment (R2-trillion). Our total foreign liabilities are equal to 72% of our fixed capital stock (R7.6-trillion). These are all stubborn facts. The large amount of foreign capital invested in this country means that we must continue to guard against capital flight and disinvestment. We need to increase FDI and progressively reduce our dependence on foreign funding of our national fiscus.
- In terms of the sector structure of our economy, it is now dominated by the services sector, which accounts for 69% of GDP. In particular, the finance, insurance real estate and business services sector has seen rapid growth over the last 20 years. We need to ensure that this sector becomes more responsive and relevant to increasing fixed investment in infrastructure, SMEs, new start-ups and new entrants. Employment in agriculture, mining and manufacturing has been in decline. This must be reversed, obstacles to new investment removed and new entrants better supported. New sectors need to be opened up to provide business opportunities to the new black business stratum.
- Despite large fiscal allocations to the education and training sector, outcomes remain poor. A poorly educated and trained majority perpetuates inequality and is a binding constraint on all the facets of social development. There can be no RET unless we fix our broken education and training system.
- Our public sector is generally weak. We need to transform our public sector to make it more effective and capable, less wasteful and much less corrupt. In particular we need political leadership that has the will, the “wise courage” and truly focused dedication, to forcefully drive the implementation of any RET strategy. Without this “magical ingredient”, brilliant national development plans and presidential nine-point plans will remain sterile pieces of paper.
These eight fundamental issues are all pretty much mutually reinforcing. We can’t address some while neglecting others. In particular, I think it is now generally recognised that high inequality and low growth are mutually reinforcing. There is also evidence that corruption and poor education, for example, both accentuate inequality and reduce economic growth prospects.
Second, we cannot ignore the stubborn fact that there are constraints on policy. We may all want more fiscal redistribution and higher public spending, but the macroeconomic consequences will be seriously negative, as the history of economic populism in Latin America, for example, makes abundantly clear.
Third, we need to accept that both the public sector and the private sectors are rather weak and moribund. In particular, the public sector (including SARB) needs to create more supportive conditions for increased domestic fixed investment by private capital, by existing “big capital”, existing SMEs, and new start-ups. I think it is relevant to point out that the two institutions under focus today, the fiscal and monetary authorities, have an important role to play in all eight fundamental issues.
Fourth, one of the most contested areas of economic policy in South Africa today is how to deal with established wealth and big business. We must accept the inevitable truth that we need big capital, and require its mobilisation in support of industrial diversification to unlock the competitiveness of new industries where we have comparative advantage. The creation of this new wealth is critical to the successful de-racialisation of the economy. The large amounts of capital required for a successful economic restructuring programme do not magically appear from heaven, and we do not want more public debt that exacerbates fiscal risk.
We need radically increased investment in fixed capital, and for this to happen we need policy certainty and more competitive costs of doing business. These include security of supply and costs of energy, costs of trade and logistics, supply and costs of skills etc. Some of our major corporates are now investing more in countries like China and Brazil, as well as elsewhere in Africa. This requires our urgent attention and a mindset change in terms of the role we see for big capital in unlocking the necessary investment for growth and transformation.
We also need a mindset change in how we go about de-racialising ownership of the economy. We must accept that efforts to date have had limited success, and we need new conversations with all economic role-players about how we radically increase the black share of assets and wealth. In doing this, we must be cognisant of historical reality which shows that crude and aggressive indigenisation programmes lead to capital flight, declining levels of investment, increased social tension, and most importantly negative impacts on poverty and employment.
Unfortunately, as we approach the December (ANC) Conference, it is becoming ever more difficult to subject RET to what Amartya Sen calls “democratic public reasoning”. Policy positions are seen as proxies for factions, which themselves are cast as representatives of competing elites. No wonder we are losing credibility day by day. The involvement of global spin doctors such as Bell Pottinger has not helped.
And as trust, both within the ruling party and among economic stakeholders, declines, economic populism takes root. Populism works best in low-trust societies, and encompasses a range of ideologies, left and right wing. In a real sense, it is more a way of doing than seeing, in which “rationality is subordinated to expressiveness”. The essence of populism is to define friends and enemies, and demand that the state takes sides and behaves in a partisan manner even if it breaks its own rules and bypasses the institutions established to uphold law.
Populism denies complexity, denies constraint, and denies risk. It distracts attention from the real issues that must be addressed, and, as evident in the current context, closes down space for democratic dialogue and conversation. It offers “absolute creative freedom to the bullshitter to come up with whatever the audience would enjoy hearing”. Hence its appeal to desperate politicians and the massive traction it enjoys among electorates. We need the wisdom and the courage to resist the bullshit, especially bullshit that divides us as South Africans.
We need to recast radical economic transformation as a genuine programme of inclusive growth around which society can be mobilised – embedded in a consensual vision – and alert to the complexities, constraints and opportunities of the current moment. DM
This is an edited version of the fifth Mapungubwe annual lecture, delivered by former Deputy Finance Minister Mcebisi Jonas on Tuesday.
Photo: Mcebisi Jonas (GCIS)
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