Whenever Zuma goes – a warning from Brazil
- Luke Jordan
- 09 Aug 2017 01:39 (South Africa)
In May 2016, Dilma Rousseff was effectively removed as the president of Brazil. That followed corruption scandals reaching into the tens of billions of dollars, and street protests that involved hundreds of thousands of people.
Rousseff’s vice president, Michael Temer, assumed the presidency and immediately got to work. He and other serious people knew what had to be done. His first priority was to impose effective cuts on education, health and science. His next priority was to loosen labour laws. Then he focused on pensions, to increase the retirement age and reduce benefits.
Each of these has debatable long-term merits. Brazil’s budget deficit was and remains too high. Its pension system was and is very generous, with retirement at around 54. The labour reform has much less in its favour, but by now that is a rite of passage for reformers, a ritual for praise in The Economist, however much research and example cast doubt on their effect.
What is certain is that none of these priorities did much for Brazil’s people in the short- or even the medium-term, and nothing was even attempted for them. The people were provided with two explanations for what was going on: in one, valiant reformers were taking brave and serious action to bring the economy back to life, which would help the poor; in the other, a bunch of insiders had taken control in the service of the rich. As the economy didn’t recover, not even in flattering GDP measures, but the stock market and the currency roared ahead, it’s no surprise which of these became most plausible. Not more than 18 months into office, Temer’s popularity dropped into the 10% range.
Then, in May of this year, Temer was himself implicated in corruption. His approval rating is now in the single digits and he may be impeached himself some time soon. To avoid it, he recently liberalised logging laws in the Amazon, in order to gain the protection of MPs controlled by logging interests. The reformer cleaning up after the corrupt is now cutting down the rain forest to stay in power.
Mexico. Italy. Others
There is a story that technocratic reformers like to tell themselves about such episodes. It’s very similar to the story Marxists used to tell: It would have worked, it just wasn’t done properly. The people would have liked it, they just don’t know what was good for them.
At some point, these arguments run out. The Brazil story may be among the worst to date, but it is not alone. In Mexico, a young president took power in 2012. He ticked all the boxes: inviting foreign investment in Mexico’s oil, attacking unions, proposed a tax reform. He promised 6% a year GDP growth. He had confetti strewn over him in Davos – “Mexico’s moment” it was called. The Economist, in a delightful phrase, called him “a charismatic reformer with a popularity problem”, but said he should “keep it up”.
That is not quite how Mexicans saw it. GDP growth has never come close to 6%. It dropped the year after Enrique Peña Nieto took power, to below 2%, and there are now celebrations when it approaches 3%. No significant economic indicator turned better – at best, some did not become much worse. In the meantime, violence spiralled, and then so did corruption. It turned out Peña Nieto’s wife had “bought” a R100-million house from a government contractor, and so had the Minister of Finance. Having been told their president was a radical, a “charismatic reformer”, after two years of “structural reform” hailed across the world, they found nothing had got much better, except more people were being killed by gangs, and their leaders still liked big houses. By 2016, Peña Nieto was so unpopular he invited Donald Trump to Mexico so he could try to look presidential. Maybe the problem wasn’t his popularity.
Then you have Italy. Matteo Renzi was the young reformer who would finally sweep aside the Berlusconi years. He passed – of course – a labour reform. He passed an education reform that somehow managed to be both lightweight and fiercely opposed. He stocked his cabinet with good, solid technocrats. He slickly sold his reforms to the public. Except then the unemployment rate went nowhere. This should not have been surprising: OECD estimates suggested at most a ~0.1% increase in growth from them. A first evaluation concluded that, if anything, growth had fallen. No net jobs were created but many workers were fired, resulting in depressed demand. Renzi’s popularity never reached the lows of Peña Nieto or Temer, but by the time he called a referendum on constitutional reform, his early exit was probably already sealed.
There is little end to such stories. They come from both the right and the left. The details vary, but not the process or its outcome. An old regime, often corrupt, ends. A “reformer” comes to power, sometimes with a bit of charisma. They hire people with good CVs but little experience among the people or in power. A standard list of reforms is dusted off. Each hurts some large group of lower-middle to lower-income people, who are then castigated as “entrenched interests”. The public is told that if those opponents are just ignored, prosperity will follow.
The logic is vague, the hurt is real, and the prosperity never comes, except in some cherry-picked averages. The “reformer” and their circles retreat into blaming the public, fervently stating how much they would have done if only they had a free hand. Democracy becomes suspicious, “populism” is thrown around, trust disappears. The damage is not as bad as Venezuela, but the door to Venezuela is opened. This is a tale from all sides of the spectrum. It describes, in some part, the presidency of Barack Obama. It casts a shadow over the potential presidency of Cyril Ramaphosa, or whoever follows.
Fortunately, an alternative to the standard recipe is available. It begins with housing. Not only is adequate housing the immediate demand of the poor, it is a job generator without equal. The German employment “miracle” (if it existed) was driven by construction. China has more jobs in construction than manufacturing. Merely closing the gap between South Africa’s rate of household formation and actual home construction – that is, just by stopping the backlog growing, not even closing it – would generate a million jobs, and generate them quickly.
Housing construction of that scale would not even require direct public spending. It would instead require unlocking mortgage credit for lower-middle income earners. Almost every middle and upper-middle income country has large-scale programmes to do so, from China to Singapore to the US. Our current policy mix has somehow combined the worst of both worlds: easy indebtedness for people on low salaries, but only unsecured, consumer credit. The working poor can mortgage themselves for furniture but cannot borrow to buy homes.
Fix that, and accelerate the delivery of public housing, and we will generate vastly more unskilled jobs than low-wage manufacturing in an age of robots could ever do. We also deliver real and lasting benefits to hundreds of thousands if not millions of people.
A second priority is direct funding of new black businesses, at scale. A couple of years ago the Nigerian government and the World Bank conducted a crazy-sounding experiment. They had a national business plan competition which picked a thousand winners, and instead of giving them consultant feeding vouchers – sorry, “incubation” and “support” — they gave them cash. Fifty thousand dollars of cash. With no strings attached. In Nigeria. Of course, people would say, this is crazy – they’re just going to take the money and go spend it on cars.
Because of how the programme was designed, its impact was measured with exceptional rigour and precision. The result? What one economist called “possibly the most effective development programme in history”. Compared to the companies that just missed the cut-off line, those that got the cash were twice as likely to survive, generated far more jobs, and were more profitable.
What would that look like here? Every year, hold a single national competition for business plans from black entrepreneurs. Spread word deep into poor communities. Aim for 10,000 entrants. Award the top 3,000 a grant, in cash, no strings attached, of half a million rand. Those that, three years later, are still in business and have a turnover of above, say, R3-million, get a second grant for R5-million. Five years after that, survivors with turnover above R10-million get a grant for R50-million. No evaluations. No paperwork. You survive and grow, and you get automatic help hitting the next stage of growth. Repeat this every year.
As a coda, it would be perverse to seed thousands of entrepreneurs, only to let dominant and entrenched oligopolies strangle them once they grow. Making this work would require a much more aggressive regime of competition enforcement. Like its counterparts in the developed world, the Competition Authority should have much stronger powers to break up monopolies and pre-emptively police anti-competitive behaviour. Fortunately, a large body of research now exists on what the barriers to competition are, and the detailed changes needed in legislation.
The cost of the entrepreneur grants would be modest, compared to the national budget. Depending on survival rates, it would be about R10-billion to R20-billion, or roughly 0.5% of total spending. A significant amount, probably several billion, could be offset by shutting down existing national and provincial programmes that mostly feed “mentors” and “advisors” or lock up capital in paperwork. For the rest, the Katz Commission suggested back in 1997 that inheritance taxes be increased to raise roughly R10-15-billion per year. That was never implemented, and today collections are a mere R1.5-billion. It is hard to think of a policy that more neatly ticks both the imperatives for growth and redistribution, for efficiency and justice, than transferring dead money, accumulated in an unjust past, to thousands of young black entrepreneurs.
The programmes above would unlock a vast amount of domestic, small-scale investment, by households and small companies. A third would do so among large ones.
We could provide a tax write-off for all investment, by any company, made in the next three years. In effect, the fiscus would be providing an incentive of a third of the cost of the investment, but only if the investment were made now. Given current corporate reserves, and their rate of accumulation, such a scheme could divert somewhere in the region of R200-billion a year into additional investment, raising it to some R600-billion. At 5% of GDP, that would be an enormous positive shock to growth.
Of course, so would its impact on public finances. The total cost would be in the region of R100-billion to R150-billion. To avoid imbalances in the wider economy, that should be raised by means that discourage consumption and encourage saving. A first means would be to halt all public funding of loss-making state-owned enterprises.
Another would be to raise taxes on dividends from 20% to 50%. Pension funds are already exempt from dividend taxes, so this would not hurt ordinary workers, and research shows that low dividend taxes do little or nothing to stimulate investment. Alongside that, ordinary corporate taxes should be raised back to their level of a decade ago. That would increase the stick for those that do not invest, and the carrot for those who do.
A third would be to introduce a new VAT rate of 20% or above on goods and services predominantly consumed by the middle-classes and above. Some argue that would be too difficult to administer, but that is simply not true in 2017. India has just introduced six sales tax bands across a population 25 times larger than ours and with a fifth of the income, in a few months, using modern technology.
Take a rough estimate that R200,000 in investment requires one new job. This programme then creates another million jobs, while ending tired and stale debates about “policy uncertainty” versus “investment strikes”. It channels R100-billion or more from unproductive businesses living off the past, whether public or private, to those investing at scale for the future.
Still not enough
Between housing, entrepreneurship, and a corporate investment boom, that totals two-and-a-half-million jobs. Those jobs are not reliant on the “voodoo economics” required to believe that making it easier to fire people will lead to millions being hired. They are concrete and real, in easily defined areas of life with clear policy failures. They will be immediate to the poor, who will see houses, entrepreneurs, and factories sprouting around them.
But they would be only a start. Beyond them loom harder tasks. Redressing the past and rural growth will both require rapid agricultural growth. One way or another, that will require redistribution. But whatever form that takes, it will fail without high quality agricultural extension services. We’ve tried building those with white papers and policies, and we’ve tried building them with faith in the “private sector”. None of it has worked.
Those same beliefs have failed in public works and construction too. One model is that the state comes up with an idea for some housing or other service delivery, holds something it calls a “consultation”, then contracts out construction. The second is that the state asks private developers to submit ideas, and provides subsidies to those it deems correct, again after a show of consultation. Both lead to delay; both lead to corruption; both lead to anger. At no point does anyone think that maybe the design and monitoring process should start and end with the people themselves. Instead, as oversight fails, regulations inevitably empower the corrupt and hobble the honest, funding is stuck or stolen, and anger mounts.
Then, there are skills. It’s remarkable how often people retreat into blind faith in the possibility of funding or, again, the private sector to create skills. A stroll around Braamfontein in January or February should end that notion. Dozens of “technical colleges” hand out flyers for courses that are a dead end. The tragedy of the technical universities is, if anything, worse. The solution is thought to be getting smart people in a room and revising the curriculum. We need thousands of technical schools training millions of people in skills changing faster than companies can themselves foresee. It is not clear how people sitting in a room will fix this.
There is a clear and common thread. Our biggest challenges require vast energy and systems to collect and act upon feedback at a rapid pace and huge scale. We need to harness the participation and build the capability of millions of our people. And we keep trying to fix them, on every end of the political spectrum, through some small group of saviours – private companies, foreign investors, officials with white papers, leaders with plans. We tried that. It was called the Mbeki and Manuel years. They led us to where we are today. They will only lead us back.
Now, not later
Some might argue that the debate about what to do and how to do it needs to wait. Let us get through this crisis. But the lesson of so many other countries is precisely that this debate cannot wait. If we emerge on the further side with no clear ideas but a rehashed set of cookie-cutter reforms, we will be heading into another crisis soon. It will probably be worse next time.
We need a clear sense of what we will do, and how that will affect the lives of the poor. We need to build ways to systematically include our citizens in the decisions that shape our lives. We need to break down the walls of the rooms where people have made decisions and open them to the systematic gathering, inclusion and use of information. We need to build houses, build entrepreneurs, change incentives, change how we act as much as who acts.
If we do that, starting from and ending with the needs and abilities of our people, we may avoid the fate of so many others. DM
Photo: Demonstrators protest against a labour reform that is voted in the upper house in front of the building of the National Congress in Brasilia, Brazil, 11 July 2017. EPA/Joédson Alves
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