Opinionista Oscar Van Heerden 27 June 2017

Reaching our ‘Lewis Turning Point’ – pipe dream or cogent vision?

Radical Economic Transformation is the latest hollow panacea of our woes in Mzansi. If some are to be believed, Radical Economic Transformation will also adequately address our triple challenges of unemployment, inequality and poverty. As various thought leaders engage on this most important topic, they spend a great deal of time trying to identify the main culprits: white monopoly capital or simply, monopoly capital, government inefficiency/corruption and/or capitalism. Far less time and energy seems to be invested in changing course or defining new approaches.

Our triple challenges of unemployment, inequality and poverty, are not trivial to solve and a few different options have been tabled.

The Democratic Alliance agrees in part with some in the ANC when it comes to their economic policy objectives. They agree that a neoliberal economic approach is required and that South Africa’s policies should broadly agree with the Washington consensus. It is not surprising that the DA position on the land issue, or put more poignantly, private property relations, simply ignores the realities of the land act of 1913 and the general dispossession of the indigenous people as it concerns the land question. The DA seems however to subscribe to some populist views, when it comes to the
“basic income grant” for all. Whether the fiscus will be able to sustain such is subject to further interrogation.

Though Julius Malema and his band of red berets entertain us no end in Parliament and elsewhere, the policies of the EFF appear devoid of history. The Stalinist doctrines of nationalisation have failed to produce the required outcomes. Yes, there might be room for an argument that says we should consider strategic minerals such as coal to be in government hands, but wholesale nationalisation simply will not work in Mzansi. Because we are an integral part of the global economy, capital will discipline us as they are doing with Zimbabwe. The less said about land grabs, without compensation, the better. I’m sure we will all agree that a cogent, practical and mutually satisfying approach is what is needed when it comes to the land question. Only if this kind of approach fails can the Constitution of the Republic be referred to and implemented accordingly.

Another approach as outlined by the then Deputy Minister of Finance (Mcebisi Jonas) at the annual MISTRA lecture goes thus: With reference to the EFF argument, Jonas reminds us that we must avoid the obvious temptations of populism, and recognise the various policy constraints within which our policy choices will be made. Short-term political expediency can bring long-term ruin, from which it might take upwards of a decade to recover. He outlines eight features of the South African economy that require our diligent attention if we are to adequately address our triple challenges.

1. South Africa 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.

2 As a result of the colonial/apartheid legacy, South Africa suffers extreme inequality, particularly along racial lines. The statistics are quite well known, but remain staggering.

3. South Africa is only partially industrialised and we have exceptionally high unemployment rates and low labour market participation rates by international standards.

4. Our private sector is dominated by large-scale capital and capital intensive industries.

5. The South African economy is completely integrated into the global economy, both through international trade, capital flows and ownership. We remain dependent on minerals based exports.

6. The sector structure of the economy is now dominated by the services sector, which accounts for 69% of GDP. Employment in agriculture, mining and manufacturing has been in decline and this needs to be reversed.

7. 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 radical economic transformation unless we fix our broken education and training system.

8. 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.

These eight features are mutually reinforcing. We cannot address some while neglecting others. Jonas concludes that the best way forward in addressing these eight features in an integrated and coherent manner is through an economic charter. At a minimum this charter must achieve sufficient consensus (commitments and trade-offs) around a few key priorities for inclusive growth, including:

· Building a capable, professional and corrupt free state;

· Increasing levels of employment and investment in fixed capital;

· Increasing the black share of wealth and income; and

· Fixing the broken education and skills system.

These are some of the options we are faced with in Mzansi. Not simple solutions with populist slogans, as these are certainly not challenges that can be resolved overnight. This is also not the first time that these challenges have been contemplated.

I’m reminded of a man who was already applying his mind to this very critical phenomenon in the 1950s. The entire world was engulfed with extreme inequality and stubborn poverty due to the exploitative and profit driven principles of our global capitalist system.

Sir William Arthur Lewis (1915-1991) was a Saint Lucian economist and the first black African to have won the Nobel Prize for Economics, in 1979. His contribution to the field of economics was that he developed the two economic models which mark out the causes of poverty among the population of the developing countries. The “Lewis Turning Point” (LTP), refers to the point at which surplus rural labour reaches a financial zero. This, in turn, typically causes urban wages to rise dramatically. Upon reaching the LTP, a country usually experiences a labour shortage which leads to a rise in agricultural and unskilled industrial real wages. This continues until a labour surplus can be attained again. Typically, reaching the LTP also causes an improvement in the wage bill with the functional distribution favouring labour.

Lewis was of the opinion that developing countries have two economies: the first economy was for the rich, tertiary and knowledge based industries and the second was for the poor, agricultural and primary sectors. Former President Thabo Mbeki used this concept in a South African context by referring to South Africa as two nations. In order to grow and advance economically, Lewis argued that the aim in such a configuration must be that labour from the second economy be actively transferred to the first economy through skills and education and training, thus reaching a point where labour from the second economy no longer exists. Labour in the primary sectors such as agriculture and others gradually migrate to the first economy in the urban centres. This migration causes urban wages to rise which gives us extra capital, which is then reinvested into the first economy, leading to significant growth, innovation and research and development. The price of labour and wages in the rural setting also increases because there is now a shortage. At least, so the theory goes. When this point is reached in any nation, it is commonly referred to as the “Lewis Turning Point”.

A point I think we should strive towards in South Africa.

It is generally accepted that China reached its LTP in 2010, when cheap labour in the country rapidly declined and real agricultural wages substantially increased. This naturally had far-reaching implications for the global economy, as you can imagine, since China was always seen as the manufacturing hub of the world. With labour no longer so cheap, capital is having to look even further afield for affordable labour.

The LTP eventually impacts on inequality. As the economy changes for the better and growth picks up, naturally inequality dissipates. Yet it remains important to also critically look at this phenomenon. First, for me the starting point must be that to effectively interrogate inequality, we must be prepared to interrogate capitalism. There is a direct correlation between the fundamentals of capitalism (exploitative labour and unprecedented profits) and inequality. Second, the question must be asked whether the struggle for equality is really about economic equality. This leads to a fundamental question: Is the struggle for equality about economic egalitarianism (making sure everyone has the same) or about reducing poverty (making sure everyone has enough)?

This denotes a policy shift from striving to all have the same towards striving to all having enough. If we all have enough it wouldn’t matter if some have more than others, surely?

I agree with Harry Frankfurt (in his new book, On Inequality) who tells us of economic gluttons, which he says are a ridiculous and disgusting spectacle. Some in our society simply want more and more. Because they can accumulate, they do. And so they bite off more than they need for nutritional purposes. It’s nice and delicious and so why not? And thus we have gluttons who simply want more and more profits at the expense of labour and equality. In fact, the gluttons argue that to have such equality, liberty must be violated. Equality is thus pitted against liberty. Here the gluttons refer to the fact that to introduce black economic empowerment at the expense of their white counterparts is infringing on rights. Similarly, to insist on affirmative action for blacks discriminates against whites. And finally, insisting on a wealth tax or curbing bonus payouts is not acceptable, and as a result, an infringement of the liberties of the rich.

Another conflict Frankfurt states is the extent to which people are preoccupied with economic equality, under the mistaken assumption that it is a morally important good. In this case their readiness to be satisfied with some particular level of income or wealth is not guided by their own most distinctive interests and ambitions. Instead, it is guided just by the quantity of money that other people happen to have. In this way, Frankfurt concludes that economic egalitarianism distracts people from calculating their monetary requirements in light of their own personal circumstances and needs. Rather, it encourages them to aim, misguidedly, at a level of affluence measured by a calculation in which, apart from their relative monetary situation, the specific features of their own lives play no part. This separates people from their own individual reality, and leads them to focus their attention upon desires and needs that are not most authentically their own. The question we should be asking ourselves is: “How much is enough?” Rather than, “How can I be more like them and have what they have?”

As Arthur Lewis reminds us, two conditions necessary for self-sustaining growth are that (1) a country has acquired a cadre of domestic entrepreneurs and administrators and, (2) that it has attained adequate savings and taxable capacity.

Whichever form of radical economic transformation will ultimately take root in our country, reaching our Lewis Turning Point has to be an integral part of that equation, lest we continue grasping at straws with regards to our triple challenges. DM