Economic lessons from the UN: Tito Mboweni should take heed

The United Nations’ Conference on Trade and Development (UNCTAD) recently released its flagship annual Trade and Development Report, subtitled “Financing a Global Green New Deal”. The South African launch was at the South African Reserve Bank.

The 2019 report holds a number of salutary lessons for South Africa, relating directly to current policy debates — in particular, to issues raised in the National Treasury’s much-debated “discussion document”.

The private sector won’t save us

First, the report cautions us that, while it has a role to play, relying on the private sector to overcome our economic woes is misguided. It notes that global structural economic challenges actually stem from “unrealistic expectations on the part of policymakers about the private sector’s ability to deliver sustainable growth and development”. It goes on to highlight that “the evidence shows that the strategy has failed to deliver on its promises”.

More specifically, it puts paid to notions that increased private-sector involvement, and private financial investment in particular, in the provision of public services is a solution.

This runs counter to the National Treasury’s proposals. These proposals specifically speak of “unbundling”, and subsequent privatisation, “private sector financial investment”, “greater competition” and “encouraging private sector participation” in the “network industries” of electricity, telecommunications, transport and water. Presumably, the National Treasury sees this occurring through strategic equity stakes, public-private partnerships (PPPs), blended finance and the like.

UNCTAD, on the other hand, points out:

“The World Bank has acknowledged that, despite its efforts, PPPs have attracted very little private investment. Even where they have been more successful, the risks were generally borne by the Bank and host country governments (IEG of the World Bank, 2014). PPPs in infrastructure have, moreover, undermined transparency and public accountability as they frequently appear as ‘off book’ transactions. Infrastructure is a public good that must be broadly accessible, but accessible and inclusive infrastructure may conflict with the objectives of private investors who seek to recover upfront investment costs through user and other fees. Blended finance introduces additional opportunity costs. It is increasingly being used as aid, which typically favours private partners from donor countries while being driven by profit rather than public interest (The Economist, 2016).”

Essentially, such schemes, where they do lead to actual investment, see the state taking on the risk, the private sector garnering the profit, and access to such public goods being limited to those who can pay.

The case of the UK shows how the National Treasury’s plan to “grant third-party access to [the] rail network to encourage private sector participation” is a disaster waiting to happen. A Manchester University report — aptly titled “The Great Train Robbery” — shows how this allowed private-sector providers to operate the actual train routes in the UK, while the state maintained the costly rail infrastructure, thus “creating artificial profits for the franchise holders and hidden costs for the public”.

‘Growth first’ strategies are too limiting

A second critical theme of the National Treasury document, also found in many of its predecessors, is that we should aim for growth first and worry about redistribution (policies to tackle inequality) later.

This, too, is contradicted by the evidence presented by UNCTAD. The UNCTAD report shows clearly how failing wage shares have been a key driver of the global economic malaise. This means a tilting of national income towards profits and away from wages. The latter, particularly for lower-income workers, are almost entirely spent — thus stimulating the economy — while profits are often saved, spirited abroad through a range of shady mechanisms, or invested in speculative financial assets.

A falling wage share — from 1990 to today, a recent uptick due to poor corporate profits notwithstanding — is a strong feature of the South African economy. In fact, South Africa’s wage share is well below the emerging market average.

UNCTAD’s statistical modelling shows how a rebalancing of the scales in favour of workers can be a critical means of stimulating the economy. A similar modelling exercise conducted specifically on South Africa and published by the United Nations’ International Labour Organisation, confirms this to be the case locally.

We should also consider other elements of redistribution as growth-enhancing. For example, women tend to spend more on education than men; shifting income to women could, therefore, have long-term economic benefits. Factoring in such evidence, at the outset, something the National Treasury fails to do, would lead to a more coherent growth strategy.

Macroeconomic policy must be on the table

Third, the UNCTAD report exhaustively details how macroeconomic policy needs to be front-and-centre in any economic recovery programme.

This, too, runs counter to the National Treasury approach which argues that the current macroeconomic framework “underpinned by a flexible exchange rate, inflation targeting, and credible and sustainable fiscal policy” should be left untouched.

While these terms may sound innocuous, they represent a policy programme that actively contracts the economy.

The UNCTAD report shows how austerity has devastating social and economic consequences. And yet, massive budget cuts — of 5%, 6% and 7% over the next three years — is what the National Treasury proposes; “credible and sustainable fiscal policy” is, in our current climate, code for debt reduction via austerity.

Austerity fails in its own terms. As UNCTAD notes:

“Despite attempts at austerity in many countries, since the early 1980s, debt ratios have failed to decrease because GDP has contracted as fast as debt or faster.”

Fiscal expansion is not only crucial to serve as an economic stabiliser during downturns — exactly what South Africa is currently experiencing — but is also critical for longer-term growth, for example, through “human capital development” via education. Gradually the global consensus is shifting back to this recognition.

It is important to note too, that well-targeted stimulus packages pay for themselves over the medium term. Economic growth increases tax revenue and reduces relative debt levels — these are measured as a ratio of debt owed to GDP, so an increase in GDP reduces debt ratios even if the actual amount of debt grows.

The UNCTAD report estimates that $1-billion spent by the South African government would increase GDP by $1.47-billion.

Similarly, monetary policy needs to be back on the table. The UNCTAD report shows how inflation targeting has benefited the financial sector at the expense of the real economy.

It would be foolish to suggest we should abandon all concern with price stability. However, we must recognise that the evidence shows moderate levels of inflation do not harm economic growth; high real interest rates can stifle investment and attract destabilising speculative capital flows; and price stability can be achieved through a range of tools, rather than only manipulating short-term interest rates, as this is a very blunt instrument in the current South African context.

In a similar vein, the UNCTAD report shows how we must consider the (unequal) manner in which developing countries are integrated into global financial markets. As has been shown to be the case for South Africa, “developing countries have become vulnerable to highly volatile private capital flows, driven by short-term investor expectations about global rather than country-specific economic dynamics”.

Mitigating this is not easy, but a number of tools are available on both the local and global level, including limited and carefully targeted capital controls. Lowering real interest rates is also critical.

Let despair not blind us

There is an understandable tendency in South Africa, with us all so gatvol with corruption and mismanagement of the state, and SOEs in particular, to think that farming the problems out to the private sector is the solution. However, the private sector seldom prioritises developmental goals. It simply isn’t how it’s wired — profit, not the public good, is its stated purpose.

The UNCTAD report makes a strong case for why we need a better-regulated private sector. But it also argues, convincingly, that the role of the state must be recentred:

“In this context, it is essential for governments across the world to reclaim their policy space and act to boost aggregate demand. To do so, they should assume a leading role in a co-ordinated investment push, both by investing directly (through public sector entities) and by establishing the conditions for productive investment by the private sector. Concomitantly, governments should address inclusiveness and sustainability challenges, by redistributing income in ways that bolster growth and by directly targeting social outcomes through employment measures, decent work programmes and expanded social insurance.”

The challenge UNCTAD poses to us is how — in the context of the mess we find ourselves in — we simultaneously oppose State Capture in all its manifestations, and rebuild, not undermine, the capacity of the state, and how we channel that capacity to serve our developmental priorities. DM