Ideological battle over how to manage our economy puts GNU on horns of a dilemma

Dear DM168 reader,

As I write to you this morning, the ANC and DA are dangling by a hair on the horns of the GNU, arm wrestling over ministerial positions – in particular in the economic cluster.

Whatever will happen at the end of this tussle is anyone’s guess, but it got me thinking about what is at the heart of it, that thing that affects every single one of us, however poor, middle class or rich; something that most of us in South Africa know very little about, other than a monthly pay cheque or social grant.

As Bill Clinton’s strategic adviser James Carville quipped in 1992, I’m referring to “the economy, stupid”.

The big economic debate in South African politics can be broken into three distinct camps. The first: state control of the economy as formerly practised in China and the USSR, with the EFF, MK and many in the ANC in this camp.

The second: broadly described as free-market, with the DA, ActionSA and Build One South Africa (Bosa) in this camp. The third: the centrist parts of the ANC and Rise Mzansi favour a mixed economy of public and private sector in which the government has some control of key sectors such as water and electricity, and redistributes income through tax policies, health, education and social grants, thus reducing income disparities.

The proponents of a state-controlled economy, the nationalisation of the Reserve Bank and strategic sectors of the economy, and expropriation of land as well as economic redress for black South Africans who were excluded from education and economic participation during apartheid, have tremendous populist appeal – as can be seen by the newly formed MK party winning 45% of the votes in KwaZulu-Natal.

On face value one can fully understand how this can appeal to voters who were dispossessed of land during the 300 years of white colonialist rule and denied economic participation during apartheid. It also appeals to the staggering number of unemployed and impoverished people in South Africa who see that the government is the largest employer in South Africa, at 1.3 million employees.

The poisoned chalice of state control, as we all know, is cadre deployment of civil servants, the massive rise in state debt because of billions of rands in bailouts given to poorly managed state-owned enterprises, and rabid corruption and incompetence, which has led to the collapse of several key state services such as electricity, water and rail transport.

Considering that many in the ANC would make better bedfellows with the MK and EFF than the market-friendly DA – which is opposed to Broad-Based Black Economic Empowerment (BBBEE), arguing that it does not empower the majority of black people but favours the politically connected elite – we can understand why there’s an impasse in the GNU talks.

But what exactly does market-friendly mean and could market-friendly policies improve the lives of South Africans? I asked my Business Maverick colleagues Ray Mahlaka and editor Tim Cohen, who both have an uncanny knack of making the seemingly arcane world of economics understandable, to explain:

The markets according to Tim:

“Over the years, literally hundreds of countries have tried to rectify historical imbalances by manipulating markets in an attempt to tip the balance towards the poor. It seems so obvious; since the existing system benefited the rich, reversing the system should achieve the opposite, and the poor will benefit. But by destroying markets you necessarily also dispense with the utility that markets contain; and the examples of the disaster this creates are now so numerous, you have to be certifiably blind not to notice. In 1950, two thirds of the population of the world lived in countries that considered themselves communist; now, realistically, there are none. Perhaps North Korea, Venezuela to an extent, Cuba perhaps.

“Because this is the new reality, any suggestion that a country will adopt a ‘contra market course’ is seen as potentially suspect, not necessarily by ‘the markets’ but definitely because of ‘the markets’. The reason is obvious: markets set prices: if a country looks as if it intends dispensing with the value markets create, they are by definition worth less. So all sensible governments are influenced by the markets; it’s part of their mandate to increase the wealth of citizens.

“Of course, it’s more complicated than this. Markets overshoot, they are influenced by perceptions, they are vacillating and can make terrible errors. But in a way, that’s all necessary, because without markets which can move, price discovery is impossible.

“The argument that the rich get richer and the poor poorer in circumstances of free markets is so obviously contradicted by the facts, it ought to be beyond debate. Both rich and poor get richer when markets are free. There are so many examples that it boggles the mind, but let’s just take two. If you were doing a scientific experiment, you would take two regions of the world and divide them into two groups; one you would give the pill, one you would give the placebo.

“Amazingly, that’s exactly what happened! Germany and Korea were both divided in half; one north/south, the other east/west. The per capita GDP of North Korea is now $900, the per capita GDP of South Korea is $32,000. Before the wall came down, the per capita GDP of East Germany was $9,670; in West Germany it was about double that. When the wall came down, Trabants came crashing through, and West Germans were astounded that this gas-guzzling, farting, cronky thing was the best East Germany had to offer.

“In some ways, nationalisation is simply a sector-specific abrogation of the utility of markets, and the results are almost always the same, for exactly the same reasons.

“Because price discovery is jettisoned, the nationalised corporation becomes a function of its political masters, or its workforce or the bureaucrats who run it. The commercial logic of the organisation becomes perverted; which is precisely why looters like the idea of nationalisation – because they are aiming to reap the benefits without having to pay the price. And the examples here are also too frequent to mention, but SAA is a great one. Because it was run ‘for the benefit of the nation’, commercial reality was jettisoned, and some other notional logic was supposedly overlaid. And it became a function of taxpayer ‘bailouts’, as we know so well.

“The solution is not to jettison the benefit of global experience, but to embrace it. South Africans of all races can and do succeed in local and global markets all the time. It’s not that hard: find something people want and sell it – your knowledge, your skills, your musical ability, your sporting prowess.”

State controlled economies according to Ray Mahlaka:

“Venezuela and SA are quite similar. Both countries are rich in natural endowments/resources (oil for Venezuela, and mineral resources – gold, platinum etc. – for SA). There’s nothing wrong with redistributing wealth to people in the form of nationalisation policies. The problem becomes that most socialist governments tend to embrace anti-democratic governance processes, and become easily susceptible to corruption and mismanagement of the economy and country’s resources.

“It becomes a jostling for resources and power among the elite and well-heeled. Socialist polices become a vehicle for corruption, and tend to stray away from the original goal of using a country’s resources for prosperity and equality for all.

“This is what happened in Venezuela, and this is why socialism in that country hasn’t really worked. The fact that MK and other parts of the RET faction call for a scrapping or review of the Constitution, makes investors nervous. There won’t be checks and balances or even accountability mechanisms for governing socialist policies, or even preventing corruption. And we know that all investors want is rule of law, obviously for selfish reasons (protection of their own investment interests).

“Also in a socialist government arrangement, the government wants to control everything. Controlling the currency and financial markets, instead of letting market forces decide on prices in a normal way. In a country like SA, the government having complete control of the economy won’t work. The state is weak and doesn’t have capacity to run things such as logistics, agriculture and even electricity. The private sector usually brings a skill set and capacity that the state doesn’t have. To completely remove private sector ownership would be a disaster. This is what happened in Venezuela in the agricultural sector. When socialist policies were implemented and the private sector was chased out, food production fell immensely, threatening the country’s food security.”

Why the ideas of RET, MK and EFF have support amongst the electorate 

While Tim and Ray's arguments clearly paint the failings of state controlled economies, what they do not explain is why there is such deep political support for the ideas of nationalisation and state intervention in the ANC and its offshoots in the EFF and MK party.  And why these ideas have such strong support from South African voters.   Part of the reason is based in support for the ANC in exile from the USSR and Communist bloc and the ANC and its cadres being steeped in socialist, African nationalist and anti-colonial thinking. The ANC, the EFF and MK party organisers, mobilisers and members are  and have been very good at communicating these ideas of liberation with people on the ground, in communities.

The DA's economic ideas fail to land convincingly anywhere other than the Western Cape because the party's leaders and members have simply not done the work to educate voters beyond their 21% that their ideas will improve the lives of the majority of South Africans.

Another reason for the traction of the ideas of state control and sovereignty amongst the electorate is a part not emphasised by Tim and Ray, the fact that left unchecked market forces and trickle down economics often screw the poor. A case in point is the financial crisis of 2008 caused by  greed through reckless lending and weak regulatory control on risky mortgages in the USA triggered a global financial meltdown as institutions holding these investments crumbled, costing millions their jobs.

We must never forget the forces that led to President Thabo Mbeki's ousting  by Jacob Zuma in Polokwane in 2008, the year of the financial crisis,  were not just united in their despise of his Aids denialism and intellectual aloofness or that he was an obstacle in the path of the next group of cadres "turn to eat", but the left in the ANC  were also opposed to his  Gear policy and Nepad  which they viewed as a betrayal of  the poor and working class.

The left’s critique of Nepad as summarised by academic Patrick Bond was that Nepad failed to take basic needs as human rights, and instead promoted market-related strategies and privatised infrastructure in line with the ‘international neoliberal agenda of free markets, transnational corporate dominance of the South, lower government budgetary spending (under the rubric of alleged macroeconomic stability), and the lowering of standards for the sake of foreign investors’.

President Cyril Ramaphosa comes from a background as a trade unionist, as the first secretary of the National Union of Mineworkers, so he knows full well the arguments of the left that ousted Mbeki and the danger that these pose to him and those who support a more mixed economy centrist view in the ANC.

As a beneficiary of BEE, when he amassed great wealth through empowerment deals in the 1990s, he cannot be seen to open the door to the DA’s anti-BBBEE policies, doing away with legislation that a select few like him benefited from. To ignore the blatant fact that the majority of black South Africans are still  mired in poverty and economic exclusion and leave it up to market forces to correct this rather than any form of state policy would be handing back the keys to the treasury vault to Jacob Zuma, whoever his new Gupta-like benefactors are and his two minute Finance Minister Des van Rooyen.

There is a lot at stake for the GNU. President Ramaphosa needs to build a cabinet of capable ministers who can and are willing to put aside their political party affiliations and ideological differences and work together to firmly direct the massive fix needed for all the broken, looted and dysfunctional parts of our government.  And to devise and implement a home grown economic strategy based on our unique circumstances as a country, that paves the way for job creation, economic opportunities and a solid safety net for the poor.

Share your thoughts about this with me at heather@dailymaverick.co.za

And look out for this week's DM168 available from Saturday at all retailers an in our e-edition available on Sunday to all insiders. In our lead story Rebecca Davis gives her take  on what to expect from the new wave of rogues and rascals who represent us voters in our brand-spanking-new Parliament.

Yours in defence of truth,

Heather

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.