The developmental state, as exemplified by the East Asian tigers in the 1960s and 1970s, can be described as a state that plans, leads and executes development geared towards economic growth. In this approach to development, states intervene in markets to drive industrial growth. The concept has evolved since the East Asian experience to focus more on sustainable development that explicitly centres on human and environmental wellbeing.
In his State of the Nation Address, President Cyril Ramaphosa appeared to align with this philosophy when he said that his “foremost priority is to build an ethical, capable developmental state”. He acknowledged that this requires building the capacity of institutions. Yet, he went on to elaborate his conception of the role of a developmental state as being to “create an environment in which the private sector can invest and unleash the dynamism of the economy” and where the government does not create jobs, rather the private sector fulfills this role. Is this the “new consensus” that the President envisages? As a development strategy, it isn’t new at all.
What we heard in the address was largely a narrow conception of development underpinned by privatisation of state-owned enterprises, private sector-led infrastructure development through blended finance, and public-private partnerships (PPPs). It is a neoliberal vision of development premised on the assumption that the private sector is more efficient, while the state is riddled with inefficiency. In this view, the state only plays a facilitative role for business. But the idea that the private sector, left to its own devices, will generate outcomes that are in the best interests of society at large, is woefully outdated at best. In fact, it has already proved damaging not only to our economic wellbeing but to the health of our democracy. It is only the state that can ensure economic growth prioritises social, environmental and civic wellbeing.
The state has a crucial role to play, for example, in ensuring that South Africa’s deindustrialisation trend is reversed. The President’s reference then to the Industrial Master Plans in his Sona is encouraging. There are, however, some important hurdles to overcome if the master plans are to succeed in their stated objectives – to transform the economy, create space for new black and women entrants, and deliberately change ownership and production patterns. The process has appeared chaotic and opaque. This has made effective participation by labour representatives particularly difficult. Some of the plans make an insufficient commitment to decent work, specifically improved working conditions and decent pay. A similar challenge exists in localising production and its inputs, and in the development of skills and training. A number of the plans lack specificity and clarity.
Strategy and resource allocations should follow sound evidence-based planning and be accompanied by detailed and thoughtful monitoring and evaluation. A functional government shouldn’t need the intervention of a Minister of Red Tape within the Presidency. However, functional government departments should be managed and equipped to overcome regulatory hurdles within existing frameworks to benefit, for example, small and medium-scale cannabis growers in a manner that they can compete internationally. Yet, National Treasury’s fiscal consolidation stance threatens to jeopardise the master plan process if the Department of Trade, Industry and Competition and associated departments do not receive the necessary funding for the proposed measures.
The state must not, moreover, neglect its responsibility to ensure that infrastructure development is responsive to the challenges of unemployment, poverty and inequality. These are not the priorities of the private sector. The reliance on blended finance and PPPs as mechanisms to drive infrastructure development, as well as the privatisation of key state-owned enterprises such as Eskom to allow for “a competitive market”, will undermine efforts to address these challenges.
Sonia Phalatse, a researcher at the Institute for Economic Justice (IEJ), found that blended finance will result in some projects receiving more investment while others languish because the private sector is reluctant to invest in vital but high-risk social infrastructure projects. In this model, infrastructure is not seen as a public good, but as a means to generate profit for the private sector. Therefore, social infrastructure, despite its importance to wellbeing, may receive little investment in the long run. This will have a negative effect on the quality of public services and development of human and physical capital and will prove deleterious to goals of job creation and growth. Moreover, women will be left to fill in the cracks of the underprovisioning of public services through their unpaid labour. The 210,000 jobs lost in the community and social services sector in the third quarter of 2021 should be a priority issue for the state. Budget cuts must be reversed if we are to avoid entrenching gender inequality, undermining social grants, and contributing to unemployment.
The IEJ’s Brian Kamanzi has also warned that South Africa should take heed as private utilities fail in the Global North following privatisation. Kamanzi demonstrates that in Europe, the UK and the US electricity prices increased, and when private utilities could no longer transfer the costs to consumers, they collapsed, with some needing to be bailed out in the face of volatile gas prices. Elsewhere, DNA economics studies have shown that unbundling of services has led to increased tariffs, an increased government debt burden, and decreased employment in the sector. Again, the state stepping out of this crucial role will exacerbate the challenges of unemployment, poverty and inequality.
The announcement of the extension of the Covid-19 Social Relief of Distress Grant (SRD), updates on the Presidential Employment Stimulus, and reintroduction of the Loan Guarantee Scheme (LGS) in the Sona are stepping stones towards constructive engagement on state-led development and job creation. However, at R350, the SRD extension is insufficient to alleviate poverty and hunger when R624 – the Food Poverty Line (FPL) – has been identified as the minimum needed for people to meet their basic food intake. In addition, concrete steps towards comprehensive and sustainable social security in the form of a Universal Basic Income Grant (UBIG) need to be urgently mapped out, to provide the foundation of dignity and basic security that is a prerequisite for economic growth and job creation. Evidence for the benefits of such a grant on the economy and people’s lives is widely available and the IEJ, together with other civil society organisations, has shown how the UBIG can be financed.
The Loan Guarantee Scheme was largely a failure due to exclusionary criteria, and unfavourable terms to small businesses. Through improved funding mechanisms such as grant funding and relaxed criteria, more businesses can access the funds to recover and retain jobs. The IEJ has consistently called for the scheme’s improvement in order to aid recovery and will be anticipating details on how it will be financed.
As the finance minister prepares to table his Budget speech, he should consider how improved social grants in line with inflation, an increase of the SRD grant to the FPL of R624, alongside public employment and industrial policy support, can ameliorate unemployment, poverty and inequality. The state must redirect its resources towards these ends, which have been proven to lead to better outcomes for people and the economy than austerity and privatisation.
Last year, former minister Tito Mboweni’s Budget speech was regressive and anti-poor, with the proposed cuts to public services and below-inflation increases in social grants. Since then, the unemployment rate has increased from 30.8% to 34.9%, and the economy was 3.1% smaller than before Covid, with 2.1 million fewer people employed since 2020. The proposed fiscal consolidation partly contributed to this state of the nation.
Despite this worsening picture, Finance Minister Enoch Godongwana continues to cut consolidated non-interest expenditure (total spend excluding debt-servicing costs) by 3.3% in real terms on an annual basis in the Medium-Term Expenditure Framework (MTEF). Given the increasing levels of inequality, the minister has the opportunity to begin to address the abovementioned challenges in his inaugural Budget speech. The fiscal space provided by higher-than-expected tax revenue should be used towards expanding support to the social and economic recovery from Covid-19 and to reverse budget cuts to public services. Moreover, in order to fulfil its duty of social care, as well as grow the economy from local communities up, the government must explore progressive taxes to raise revenue.
We have put forward detailed options for this, including a VAT on luxury items, a wealth tax and a social security tax. Tax increases must not impact low- and middle-income households, such as by increasing VAT or personal income tax.
To address these challenges, the state has to build its capabilities towards a bold vision to coordinate and drive sustainable development that centres on human and environmental wellbeing. This will entail, but is not limited to, expanded social protection, job creation and quality public services. It will also require policymakers to acknowledge the interdependence of these objectives – we cannot achieve one without the others. This is the new consensus that the social compact should be premised on. DM/MC