What are we to make of the recent flurry of contributions from academic economists of “the left”, notably here, a series penned by Neil Coleman on rebuilding our shattered economy.
It brings to mind an old joke: A physicist, a chemist, and an economist are stranded on a desert island with no tools – but they do have tins of food. The physicist and the chemist each devise an ingenious mechanism for opening the tins. The economist says, “Assume we have a can opener!”
Assuming a can opener into existence is not the only problem, it is the idea that where we are now is the “recycling of outdated ideas” and that they have not been taken seriously before because they don’t conform to “conservative economic orthodoxy”. The debate can’t move forward because it becomes an ideological battle between firmly held ideas of self-identified left-wing economists and those whom they describe as right-wing or conservative. It’s as if they want a rerun of the second half of the 20th century, on their academic or think-tank salaries when almost everyone else has moved on.
These economists advise us that what ails the economy is something to do with austerity measures and contractionary monetary policy. Both these claims are beyond bizarre. Ever since 2008, South Africa has been running significant deficits – breaching spending targets regularly. That is the opposite of austerity. One result of this is a ballooning debt north of R3-trillion – and the cost of servicing it is the fastest growing item in current expenditure. In developed rich countries, that level of indebtedness might seem acceptable, but for a country like ours, it is far too high.
It is a wondrous thing that that debt, whether held domestically or by foreigners, is in our own currency. Not every country, and some much stronger than ours, including several in the eurozone, has that privilege. South Africa does, largely because we have the benefit of very deep and liquid capital markets and we can have those in our own currency because the rand has not been debased – yet.
The idea that we should have a more expansionary monetary policy because we can afford to have higher inflation demonstrates that those proposing this refuse to understand that it is the very rich who can best cope, and even prosper in a high inflationary environment. Further, we are a relatively open economy with low rates of savings dependent on inflows of capital looking for a real return. You can’t simply “assume” that away.
There is little point in getting into pointless debates about which economic models work. State-led economic development can and has succeeded elsewhere – particularly in a number of Asian countries. Scandinavian style social democracy does appear to result in more equal societies – even if left-wing economists often fail to see the widespread use of market-based mechanisms in those countries.
Let’s not quibble with the fact that state-led strategies to transform an economy or drive industrialisation can work and have worked. In less than a generation, the world’s second-biggest economy, China, has grown from being one of the poorest countries to a per capita income that surged past South Africa’s around 2013 and Latin America’s in 2017. Let’s also not quibble with the fact that almost all rich countries, including the US, have seen the state play a far bigger role in their economies as they have become richer. There is a lot of support for a wide range of interventions – even if most of it is contested by ideologues on what most people categorise as the “right”.
But let’s look at all those examples in the most generous possible way.
China’s (and most of the so-called Asian Tigers’) industrialisation was undertaken on the back of ultra-cheap and exploited (at least initially) labour and with little democracy or democratic rights. Those countries, despite their widespread conditions of poverty, had very high savings rates, but more than that, they had a core bureaucracy and political leadership that had an ability to plan, coordinate and implement steps to achieve a vision for economic development.
Scandinavian countries are referred to as “high-trust societies”. That means societies that display a high degree of mutual trust not imposed by outside contractual, legal or hierarchical regulation but based on “prior moral consensus”.
What do we have? A country with declining industrialisation built on the exploitation of natural resources and the brutal dispossession of the majority of the population that after at least a century of struggle made a democratic transition. More recently, we have spurned the opportunities afforded us by that democratic transition and failed to address the legacies of our past. Our relatively expensive education system still produces learners who can’t “read for meaning” or undertake basic calculations.
Instead of dealing with high levels of concentration we have state-sanctioned cartels in crucial input markets. Instead of opening up the economy we have a form of elite capture, commonly referred to as BEE. Government expenditure is high for an economy at our stage of development, but far too much of it is absorbed by civil servants who appear unable to do the work expected of them. More than 40% of government expenditure is outsourced. State-owned companies that might be expected to play some developmental role in the economy are under-capitalised, close to bankruptcy and driving up the cost of the main cause of inflation in this economy – their administered (and not market) prices.
Organised labour, having fought for decent wages and fair working conditions (and playing a big part in securing the democratic transition) is not going to go along with a low-wage route to re-industrialisation and has enough political power (unless runaway inflation decimates the value of their wages) to prevent even a suggestion of this route.
Of course, South Africans don’t save enough, so we have to rely on the savings of others through debt. That comes with certain conditions – such as a reasonable return to debt-holders.
We can’t blithely go beyond the debates on State Capture because there is no consensus on how it got to this point. The shenanigans of the Zuma regime is one thing but consider that a non-Zuma political formation, the EFF, with only the smallest opportunity, allegedly plundered VBS, its depositors and guarantors. Perhaps it is unfair to point at these examples. Is it not also State Capture when large numbers of teachers are not in class teaching when they should be, teaching subjects they have not mastered and then have their union, SADTU, resisting steps to remedy the situation? Anybody interacting with the public sector has their own stories to tell.
The reality is that we are a low trust society. A low trust society is one that is kinship-based and where outcomes include difficulties in forming and maintaining corporate structures, institutions that are corrupted or dysfunctional, high levels of crime and declining willingness to pay tax.
The argument is not whether policies favoured by the left work (or even whether a can opener is the best tool to open a tin of food), but whether the necessary conditions for their favoured policies are in place.
Take Eskom for example. It is a wholly state-owned monopoly responsible for almost all of South Africa’s electricity supply – a developmental model favoured by the left. But it is in an awful mess. Even starting to fix it will impose high costs and pain for all South Africans. Economists from the left will have their own ideas on what should or shouldn’t be done – especially when it comes to privatisation of significant parts of the electricity system. But if these economists are to be taken seriously, they need to have a good idea about how Eskom got to this point. Simply saying that we have to move beyond State Capture is not good enough.
An honest assessment of what pre-conditions could exist and which are absent could lead in interesting directions – particularly if the Theory of Second Best is taken into account. Assuming that the optimal outcome is a fast growing, industrialising economy with low unemployment and low levels of inequality, but to achieve this with standard “progressive” economic policies requires a number of pre-conditions to be in place, what happens if one of them is missing? Working with what you think you have in place and pursuing the same policies won’t get you closer to the desired outcome; it may make things worse. Something close to the best outcome can more likely be achieved with completely different policies that work with the starting conditions we have.
South Africa’s economy is in a dire state and there are many reasons for this. The government describes itself as being on the left. Any economic policy suggestions would have to be consistent with this political orientation. But we can’t assume that the requirements for these policies to work are present when they patently are not. The creativity that economists of the left need to harness is how to work with the country and society that we have. Policies that might work in other societies but simply provide a foil for future episodes of State Capture in a country falling further behind on every economic measure are not heterodox, they’re stupid. DM
In other news...
July 18 marks Nelson Mandela day. All over the country, South African citizens devote 67 minutes to charitable causes in memory of Madiba. It's a great initiative and one of those few occasions in South Africa where we come together as a nation in pursuit of a common cause. An annual 67 minutes isn't going to cut it though.
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