Gilad Isaacs (GI): I’d like to start with the global context. What do you think slowing growth, reduced trade, rising anxiety, and risks in financial markets mean for a small open economy like South Africa? What sort of threats and opportunities exist?
Joseph Stiglitz (JS): Countries around the world are facing hard times: China is slowing down, and would be irrespective of Trump; uncertainty is depressing investment around the world; in Europe, Germany is not prepared to use demand-side policy, so growth is slowing in Europe (Germany is officially in a recession); the US economy is not doing as well as it should be, given the magnitude of the fiscal stimulus; although the Trump tax cuts had a short-term stimulus, its overall design was poor – growth has already slowed down; and to compound all this, multilateralism is being undermined and there is pervasive uncertainty.
This creates a difficult international environment for developing countries like South Africa. In addition, the situation is not the same as at the time of Asian growth – a time when markets were open and opening further. Now it’s moving in the opposite way.
The structure of the economy is also moving towards services. Services are not as tradeable as manufacturing, and cheap labour is not as important as it was before because of technology. So, that means that developing countries will have to work harder to find export niches and you have to think more strategically about what are the export niches that you can hopefully fill.
GI: How should South Africa approach these new circumstances?
JS: You need to try to deconstruct why the export-led manufacturing model was so successful in East Asia. Manufacturing combined in one sector everything that was needed – technological upgrading, foreign exchange, tax, employment, etc. The manufacturing sector played an important catalyst for entire economies.
If you can’t replicate all of these things in one sector then you have to put together a portfolio of sectoral interventions in order to achieve the same success: Along with niche manufacturing, agriculture and tourism can generate employment, and the service sector is an important sector of the future,.
On the positive side, South Africa is in the unique position of being the most developed country in Africa. This means, there is a short window in which South Africa can pursue a strategy, if not manufacturing-led, at least in which manufacturing plays a prominent role, because of the need for manufactured goods in Africa. And it must take advantage of this.
If you solve the corruption problem, you can also be the intermediary between foreign businesses and the rest of Africa.
In your own manufacturing, you must also think about adaptation. For example, African roads are different from highways in most of the rest of the world – they’re a little rough. You already produce automobiles, so how do you adapt these and become the leading supplier to Africa? Also, once you establish the marketing network you can do the servicing, and it’s in the service sector that you get a lot of the profits.
GI: In terms of the role of the state in supporting these types of industries, we seem to be in an era where the state is resuming a more directive/interventionist role, and that seems to be happening both within African states and also globally.
JS: Very much so, and I’ll give two examples.
Justin Lin, when he was chief economist of the World Bank, put industrial policy at the centre of his agenda; this may be natural as he’s coming from China.
But if you go to the website of Senator Marco Rubio from Florida, who is a Republican, he has a policy paper that you would have thought came from the left of the Democratic Party. It is very much about the role of the state in promoting particular industries. In reality, the United States has always had industrial policy but hasn’t admitted it. For example, the US promoted derivative markets by making derivatives the first claimants in the event of bankruptcy.
GI: It seems as if we are also seeing a more interventionist role of the state beyond industrial policy too. Even the IMF is concerned over inequality, recognises that monetary policy alone is insufficient, that capital controls may be necessary. So is this a recognition that the state’s role is shifting in multiple kinds of ways?
JS: Yes. Look at climate change, there is a growing consensus that this is an existential threat and the market can’t or won’t solve that on its own. So if you list all the major issues that society faces – pollution, climate change, financial instability, inequality, healthcare – it’s very clear that none of these can be solved by the market without government intervention.
GI: While we are talking about the role of the state: one of the things which we spoke about at the ministerial forum was austerity. You were quite damning about the international “non-justification” for austerity and the shift that has happened subsequently. Could you say something about what has happened in the last 10 years?
JS: It’s very clear among the economics profession that for many countries – Germany, Britain, the US and many others – austerity has never worked, that there’s no such thing as an “expansionary contraction”, that austerity is contractionary, it leads to downturns – period. Take the recent Presidential Address of the chief economist of the IMF, Olivier Blanchard, who said that big deficits may be fine. That’s a major big change in perspective for the centre-right.
GI: And in South Africa?
JS: Smaller, open emerging markets do face additional constraints.
Unfortunately, capital markets don’t have the sophistication that academic economists do. So Moody’s might not share the same view of debt and deficits. As a result, this requires more institutional innovation, ingenuity, and careful design. For example, a greater role for development banks; even New York State has set up a development bank – a green bank. Second, to think about areas where you focus on domestic resource mobilisation which is under-employed, as opposed to areas that might suck in imports and thus deplete foreign exchange. Take housing for example. Most of the inputs to housing could be made domestically, together with plenty domestic labour. This could make it a good sector to spend money on.
A growing economy would mean some people want to consume more imported goods. So it would be important to use other policies, for example tax policy, to aggressively support domestic production – within the confines of World Trade Organisation (WTO) rules.
For example, many countries import premium biscuits but make cheap biscuits at home. But there’s nothing in WTO law that says you can’t have an excise tax on expensive biscuits to drive consumption towards domestic production and discourage consumption of imported biscuits. It’s also justifiable in terms of equality. Possibly the same could apply to cars or other products. Think about ways to encourage domestic production and discourage spending of scarce foreign exchange.
So, the idea is to spend in ways that have high multipliers, but also where you don’t run into constraints. You don’t have a constraint on domestic labour. So, if you could put domestic labour to work that would have a positive impact with a low inflationary impact.
GI: Given negative interest rates internationally, the fact that international capital is searching for high-yielding investment, and our current debt levels, would you say South Africa has hit real constraints? Or are we imposing austerity at a time when it’s going to have a contractionary impact?
JS: Austerity will have a contractionary impact, the question is, do you need it now? And I would suggest that probably not. It makes sense to recognise that you do have limitations on borrowing capacity and so to think carefully on how you borrow, and how you increase domestic saving and reduce foreign consumption.
The cost today – both economically and politically – of austerity is very high and I can’t imagine that there aren’t things to spend on that would both be socially very productive and generate a lot of jobs, and be fiscally responsible.
GI: [Recently] we had the MTBPS [medium-term budget policy statement] and there was an announcement of widespread cuts both in terms of social services – health, education and so on – and also in terms of infrastructure investment. Put in a crude way: would you turn around and say to us “that’s the wrong way to go’’?
JS: What I would say, is I would be very worried. If we take Portugal as the alternative model, they showed that getting rid of austerity led to more growth and naturally improved the fiscal picture, whereas in Greece which implemented austerity the downturn worsened the budget. So I would say Portugal is what you want to be thinking about – not Greece.
And then the question is finding activities that strike the right balance between employment-generating activities, high multipliers, the appropriate distributional consequences and the constraints I mentioned; and how you can avoid these constraints. And if your tax revenue systems is working then these would probably net generate revenue.
GI: Given the evidence, how to do explain the resilience of the idea of austerity?
JS: Austerity is linked to the debate over the size and role of the state. Too often this is not really an intellectual debate involving economic science. From an intellectual point of view, it’s clear that stimulus is needed during depressions. According to economic science the answer is clear – stimulus. But if you’re committed to the view of a limited role for the state you ignore this.
There was this sort of resistance to Keynesian economics when it was first introduced during the Great Depression. There were a lot of people that didn’t want any role of government and the idea that you needed stimulus ran counter to this. Those that hold this view are committed to notions of efficient markets and limited state intervention; economists put on blinders all the time.
GI: How do we change this?
JS: We need to try to explain there are policies that can get us out of a deep downturn – Keynesian and industrial policies did and do work – and that austerity has caused economic collapse, for example in Greece, or the US Great Depression. Civil society plays a very important role in translating these ideas to make them more widely accessible and in creating a broader public debate about these ideas.
GI: In complementing fiscal expansion what are your views on questions of central bank mandate?
JS: Clearly the inflation mandate is the wrong one. The main macro problem today in most countries is unemployment. Obviously you can’t pursue that without considering inflation or the foreign exchange rate, but it is growth and employment that you should be focused on, with a sensitivity to the impact it might have on either the exchange rate or inflation. Many countries are abandoning inflation-targeting; economic theory has explained why it was a very silly idea in the first place and why it hasn’t worked.
GI: Lastly, when speaking about expenditure the debate over a wealth tax is raging in the US, and I would say should be raging in South Africa. What are your thoughts on a wealth tax, in South Africa especially, given that wealth inequality is so high and with wealth often inherited from an unjust history?
JS: In the US, unambiguously we need a wealth tax and we need to close all the loopholes in our capital taxation. Regarding loopholes – why should workers be paying higher taxes than those that have capital income? But then the question is – should there also be a tax on these mega fortunes? Would it lead to a decrease in entrepreneurship? Absolutely not.
In South Africa, you have a problem of a small open economy – will people take their money out of the country? I think that open economies ought to be thinking about taxes on capital outflows, so if you pull your money out of the country there’s a tax, so you can’t escape taxes.
GI: And combine that with a domestic wealth tax?
JS: Multimillionaires mostly got their wealth from one form of exploitation or another, or just luck. In any case, their behaviour would not be any different if they had 100 billion or 97 billion or 94 billion.
I don’t feel too bad about a tax of more than 100% on the super-wealthy because what you’re trying to do is eliminate excess wealth inequality and the perpetuation of an inherited plutocracy. There is, of course, a debate at what level one starts such a surtax– at one billion or two billion or 500 million. But one does have to think carefully how you interact a wealth tax with a capital income tax; is this a tax on the accumulation of past returns or a tax on investment? One aspect of wealth that I think ought to be particularly taxed is natural resource and land, because these assets cannot be moved out of the country.
GI: Absolutely. Thanks for taking the time to talk to us. I think you’ve raised a lot of issues that are very relevant to the South African context – our place in the global and African economy, the role of the state, austerity, and taxation are all issues we’re grappling with.
JS: I’m glad it was useful. MC
Dr Gilad Isaacs is co-director of the Institute for Economic Justice and a member of the Budget Justice Coalition, South Africa. This is an edited transcript of the interview. With the permission of Professor Stiglitz, it also draws from remarks that Stiglitz made at a forum convened by Minister Ebrahim Patel at which Dr Isaacs was present.
"Don't be so humble - you're not that great." ~ Golda Meir