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Bad economic policies are pushing us over the social cliff, it is not too late to pull us back


Neil Coleman is Co-Founder and Senior Policy Specialist Institute for Economic Justice. @NeilColemanSA

Macroeconomic policies that have led to austerity are both wrong and unnecessary, and there are serious, viable alternatives. It is not too late to pull us back from the edge of the cliff.

“Always bear in mind that the people are not fighting for ideas, for the things in anyone’s head. They are fighting to win material benefits, to live better and in peace, to see their lives go forward, to guarantee the future of their children” – Amilcar Cabral

South Africa has enormous unrealised potential. We are regarded as an upper-middle-income country, with considerable wealth and natural endowments. Much of our productive potential is unutilised.

We have massive untapped human capabilities. Unlike the ageing societies of the global North, we have a youthful population.

We are located on a continent that many see as the continent of the future. We are part of a powerful grouping in the global South that is starting to assert a new vision of global economic development.

However, we are developing way below our economic potential. This is a serious problem, but also a significant opportunity to move forward.

I will expand on this paradox below.

We know what our challenges are: extreme poverty and hunger; unemployment and inequality; the energy crisis; corruption and deteriorating infrastructure; and to these we can now add the climate crisis. We must constantly be conscious of these multiple, interlinked crises.

But it helps no one if we merely list them, over and over again. People need to hear serious, concrete, solutions to these complex and deep challenges. They want to see their lives, and those of their children, “go forward”.

The country’s assets are significant. But we are turning these assets into liabilities, in particular through misguided economic policies. The evidence suggests that these policies, instead of putting us on a new development trajectory, are deepening many of the structural features inherited from the apartheid era.

Our natural resource endowment is being squandered as we lock ourselves into the colonial pattern of exporting raw materials, and importing finished products. At the same time, we are hollowing out our manufacturing and productive capabilities through macroeconomic policies which retard the real economy, and promote excessive growth of the financial sector.

The huge potential which lies in our youth is being frustrated by these economic policies which marginalise them and exclude them from the economy (with over 70% youth unemployment). Apart from wasting their potential, this creates an explosive social situation, a ticking time bomb.

The benefits of bringing the majority of people into the mainstream economy are being stifled by the massive concentration of wealth and economic power. The evidence is clear — economic policies are resulting in growing levels of economic inequality: A recent report revealed that in a mere 22 years — from 2000 to 2022 — the Gini coefficient for wealth had risen from around 80% to 89% (0 is perfect equality and 100 is perfect inequality. South Africa by this measure, as well as the measure of income inequality, is the most unequal country in the world).

SRD grant contention

The share of the vast majority of people in the wealth of the country has collapsed: in 2000 the bottom 90% of the population held 30% of the wealth. Incredibly, by 2022 this share had plummeted to 19% (or put another way, share of wealth by the top 10% had increased to 81%)! We must consider this when we are told, as we are repeatedly, that the wealthy pay the lion’s share of income tax, and that our tax system has reached its limit of progressivity.

Interventions to combat hunger and poverty are being frustrated by excessive fiscal caution, and reluctance to adequately resource public services and social protection. The important measures introduced during the Covid-19 crisis are being blocked by a National Treasury which is opposing the extension and improvement of the SRD grant on narrow ideological grounds.

This critical intervention, which costs less than 2% of the national budget, has directly or indirectly benefitted 31 million South Africans, or the poorest half of the population — the most efficient and effective imaginable use of state resources.

Yet Treasury has refused to increase the value and reach of this grant, or to accept its transformation into a longer-term income-support measure. This is despite all the evidence which shows its benefits in stimulating economic activity in poor communities, promoting job search, and self-employment. This refusal to improve our poverty interventions is leading to a pandemic of hunger (seen most tragically recently in the Eastern Cape family suicides).

The state should be a major generator of growth and development. But evidence is clear that budget cutbacks and austerity are leading to the hollowing out of the state, defunding of the public sector, and a large decline in public investment.

Combined with massive corruption (itself generated in significant part by the lack of inclusive economic development), this has led to the degrading of our infrastructure. Cutbacks have also had devastating impacts on our human development and security, with growing school class sizes, underfunded and overstretched health facilities, and shortages of police and criminal justice personnel.

All of this is underpinned by misguided macro-economic policies, in particular fiscal, financial, and monetary policies which lead to economic stagnation, which block development, promote deindustrialisation and excessive financialisation (disproportionate growth of the financial sector), and therefore fail to promote labour-intensive, productive growth.

In part, these are legacies of the apartheid growth path. But they are also the product of inappropriate policies adopted in the democratic era.

Crippling austerity

Many of these challenges require medium-term solutions. But the self-manufactured crisis of austerity is immediate, and can rapidly be turned around if we aim to advance the socioeconomic development and rights promised in our Constitution. There are serious, viable alternatives.

But these can only be pursued outside of the outdated economic paradigms which have held our government captive over the last few decades.

However (I hear some of you say) National Treasury and multiple financial commentators have told us that we are facing a fiscal cliff. Is this not the case?

Are we not on the verge of a debt crisis and implosion of our fiscus as we face revenue shortfalls and spending overruns that have necessitated Treasury to instruct all departments and state entities (an instruction subsequently repudiated by Cabinet) to freeze and cut spending?

No. We are not facing an immediate fiscal crisis, or a fiscal cliff, in the sense of “running out of money” or debt “spiralling out of control”.

But we are heading towards a social cliff, with millions at risk of being pushed over the precipice as a result of these cuts.

Ironically it is austerity measures, if they are not abandoned, that will ultimately push us towards a fiscal cliff, as austerity measures are fundamentally anti-growth and anti-development (even the IMF has acknowledged that on average austerity does not result in reducing debt).

Those are the key elements underlying our current fiscal challenges. If we do not change direction, mindless austerity policies will push us over both these cliffs.

Contrary to the panic being manufactured, research recently published by the Institute for Economic Justice shows that the current fiscal challenges, serious as they are, are manageable, and do not justify the extreme measures proposed by Treasury.

Further, there are a number of mechanisms available to mobilise resources to address the fiscal shortfalls. I won’t go into this evidence here, as a comprehensive article in Daily Maverick summarises the research and proposed solutions.

I encourage everyone to read the IEJ Policy Brief, and consider signing an open letter by over 100 experts and organisations calling for alternatives to the planned budget cuts.

I started off by describing how we are developing below our economic potential.

History shows us that countries punching below their weight, who have been able to turn things around, have unlocked exponential growth and development. East Asian countries in the 1960s were basket-case economies, and are now known as the Asian Tigers.

The New Deal following the deep US depression similarly catapulted the US onto a new trajectory, as the Marshall Plan did for post-war Europe, which had lain in tatters.

Brazil’s minimum wage and social protection policies in the early 2000s, following a period of brutal dictatorship, got the “giant wheels of the economy turning” as President Lula said.

These experiences have three things in common: decisive political leadership; building of a strong state that leads development; and the bucking of economic orthodoxies dominant at the time.

Such experiences have shown that it is possible to engineer exponential development in a variety of ways. Naturally, the details of this new growth path depend on local conditions, for instance through using new technologies, building productive capacities, and raising economic demand and incomes in depressed communities. So we need to re-imagine policies which can begin to realise the potential I spoke of at the outset.

Imagine if…

  • Every household had a minimum income;
  • A virtuous cycle of economic activity and inclusion in every community, rural and urban, generated millions of jobs and enterprises; and
  • We had a developmental fiscal and monetary policy which ensured access to services, promoted investment, and empowered a capable state.

This can be done.

If we change course. DM

This is an edited version of a speech given at the Social Justice Summit on 12 October 2023.


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