Part Two: Building Blocks for a new economy

In the first of this two-part series [1], Let’s build a new economy for the many, not just the few (Daily Maverick 4 June 2019) I argued that with the necessary bold thinking, political will and intelligent strategies, we can build an economy which benefits the many, and not just the few. Although our economic problems may seem intractable, various international experiences show that a dramatic social and economic turnaround is indeed possible.

To achieve this, we need to avoid the recycling of outdated ideas, which have not succeeded in moving us forward over the past 25 years. The president, in particular, needs to give leadership on addressing this economic challenge, and engage relevant and fresh ideas, as he did in confronting the complexity of the land issue.

We need to go beyond the debates on State Capture, as critical as they are, to tackle the serious issue of moving the economy out of its current deep morass.

The shocking GDP figures released last week, showing a 3.2% decline, came hot on the heels of the fall in employment seen in the first quarter of 2019. It also follows a technical recession in the first half of 2018. This underlines that we are facing a national emergency, which requires a proportionate response.

The contraction in the economy has not only been due to the disastrous impact of the Eskom crisis, which has no doubt been severe. Austerity measures (spending cutbacks) and contractionary monetary policy (through high-interest rates), compounded by the precipitous drop in public investment since the late 2000s, has significantly contributed to the strangulation of the economy.

We have many talented and progressive thinkers in the country — in universities, think tanks and civil society — on a variety of economic and social questions, whose ideas have often been marginalised because they don’t conform to conservative economic orthodoxy. Their creativity in solving our problems now need to be harnessed. I outline some ideas here, and link to concrete policy proposals that have been made [2]. These are by no means exhaustive, but show that it is a fallacy that progressives are not offering alternatives.

These proposals build on the three types of intervention that Part One argued should be introduced in a carefully sequenced manner, and implemented with the necessary boldness. These were: (i) a macro-economic investment and stimulus package to get our economy going; (ii) a stabilisation package to protect the most vulnerable people, communities and sectors; and (iii) a package of measures to systemically transform our economy over the medium term. Naturally, some of the issues are overlapping.

Pillar 1: A macro-economic stimulus and investment package

Many countries adopted stimulus measures in response to the economic downturn that followed in the wake of the 2007/2008 global financial crisis (GFC). In September 2018, following a technical recession earlier that year, President Cyril Ramaphosa announced that government would implement a fiscal stimulus package. However, what followed was largely a reprioritisation of state spending within an austerity framework, with no additional stimulatory expenditure. Unsurprisingly, this has failed to turn the wheels of the economy.

The government now needs to follow its own countercyclical policy, that is the adoption of expansionary fiscal and monetary policy measures in periods of economic contraction. This includes injecting new spending into the economy and reducing interest rates to make investment more affordable.

If used correctly, state economic levers can be harnessed to ensure a relatively immediate impact on the economy, through an aggressive fiscal stimulus and public investment programme, coupled with a more expansionary monetary policy which stimulates economic activity.

A real fiscal stimulus would inject up to R500-billion of additional funds into the economy over three years. This needs to be targeted in three ways.

First, towards sectors that have a high “multiplier effect”, that is, where each rand spent generates a large amount of economic activity in connected sectors; this is particularly true of South African manufacturing sectors.

Second, towards infrastructure. Infrastructure, in addition to having a significant multiplier, greases the wheels of other economic activity. We desperately need to repair our rail, streamline our ports and expand access to the internet while reducing the price of data. Investing in regional infrastructure is also crucial to expand exports.

Third, putting money directly in the hands of poor people, serving the dual objective of relieving hardship and stimulating domestic consumer spending.

Of course, we need to debate where such additional funds may come from and we should not be reckless with the national purse. Our national debt, for instance, is not particularly high, but Eskom’s financial fragility is a real danger. Most importantly, this discussion should proceed from the basis that a fiscal stimulus is essential and not finding the funds is economic suicide.

The need for a stimulus contradicts the current pursuit of narrow austerity policies by Treasury (policies of large-scale spending cutbacks), which have extremely damaging social and economic effects, as outlined in this submission to the United Nations.

Second, many highly respected economists such as Joseph Stiglitz question the value of inflation targeting. We cannot allow ourselves to be intimidated into silence on the important question of monetary policy, and the Reserve Bank mandate, because people with dubious agendas have jumped on this bandwagon in South Africa. While protecting our institutions from predators, we must also ensure the institutions such as the Reserve Bank play their developmental role.

We need to revisit prevailing monetary policy as high real interest rates are choking economic activity by raising the cost of capital and making investment expensive. Despite the 2010 letter to the Reserve Bank by the Minister of Finance indicating that they should include growth as part of their mandate and that they had the flexibility to go beyond the 3-6% target band, this has largely been ignored. Instead, the Reserve Bank has lowered the target — apparently unilaterally — and adopted a de facto target of 3-4.5%. So a clear mandate change is indeed necessary, preferably in legislation [3].

A three-pronged approach is necessary.

First, we must ensure Reserve Bank policy is targeted at growth and employment, as well as inflation. This need not alarm us: If high levels of inflation are bad for growth and employment then the objectives can be pursued in tandem.

Second, we must revisit the current inflation target (3-4.5%) and query whether reducing inflation to such low levels is of actual economic benefit, outweighing the associated costs (the evidence overwhelmingly suggests it is not).

Third, we must make use of a broader range of appropriate tools. For instance, increasing interest rates most effectively targets inflation caused by “overheating” (too much demand) in the local economy. South Africa’s inflation is largely “imported” due to oil prices, exchange rate movements and other factors beyond our control. We are therefore relying on the wrong tool.

The technical solutions involved in managing monetary policy require delicate balancing acts but we cannot be dissuaded from debating the issue by pure assertions of inevitable economic catastrophe.

The above stimulus package should be located in a broader developmental macro-economic policy which aims to realign and rebalance the economy in a way that stimulates productive investment, and reduces reliance on speculative short term capital flows.

We need to actively use levers of macro-economic policy to stimulate economic activity, particularly in the real economy [4]. Policy options to achieve this are set out by Gilad Isaacs in this presentation, and this policy brief.

Questions which need to be debated include: Whether resources are available for an economic stimulus package, and whether the level of debt is an absolute barrier to fiscal stimulus (at 60% our debt is not higher than most of our peers — Moody’s report 15 May 2019). And therefore whether fiscal austerity or “consolidation” is unavoidable? How to deal with the critical Eskom situation, including its massive debt, and other SOEs? And whether a growth and employment mandate for the Reserve Bank would lead to hyper-inflation — the international evidence doesn’t support this conclusion.

Pillar 2: Stabilising measures to manage the transition

Conflict and instability threaten not only our economy, but the fabric of our society. We are faced with the explosive combination of: Vested interests resisting the need for transformation; considerable unhappiness among ordinary people, and growing anger among the youth about the lack of change or its slow pace; and growing fragmentation in political organisations and those in labour and civil society.

Appropriate stabilisation measures can simultaneously protect the most vulnerable people, communities, and industries, and have a stimulatory effect through circulating money and raising demand in local township and rural economies. This can be done relatively quickly and efficiently through income transfer programmes to supplement the existing social security measures.

Particular attention needs to be given to improving the lives and creating pathways for progress for youth, women, the unemployed, and working poor in economically depressed township and rural communities.

Such stabilisation programmes could include consideration of:

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  Interventions which improve people’s quality of life and reduce social distress, including action to contain costs of essentials (for example, food and transport) and improve services;

  
  


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  Practical assistance for people who are excluded from the labour market, through social protection particularly for the adult unemployed (see this proposal for a Workseekers Grant; or Employment Guarantee Scheme — which guarantees public employment for a specified number of days a year, as in India; or a Basic Income Grant);

  
  


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  Measures to significantly expand the number of youth absorbed in the FET sector, which will both buffer youth unemployment in the 15-24 age category, and help create pathways to employment, as demand picks up;

  
  


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  Concrete measures to reduce income inequality, such as those suggested in this policy brief to reduce wage ratios, reconfigure the wage structure and introduce wage moderation at the top;

  
  


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  Measures to protect jobs in vulnerable or distressed sectors, using industrial policy tools, as we have seen in the clothing and textile sectors and strategic deployment of trade measures; and

  
  


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  Support measures for depressed regions.

  
  

Some of these measures could be financed through the fiscal stimulus and would have significant multiplier effects as they raise the levels of income, and effective demand, in poor communities.

Such concrete measures, which immediately improve peoples’ lives, would help to create a different climate while the structural interventions outlined below are implemented.

Pillar 3: Systemic interventions

As outlined in Part 1, our economy is structurally dysfunctional. Longer-term systemic interventions to structurally transform our economy, including through industrialisation and diversification, a Green New Deal, and a programme for African regional development, are therefore essential. We face the challenge of doing this in the post-global economic crisis environment, with large shifts in international trade and investment, and in the context of rapidly changing technology. This presents both challenges and opportunities. Systemic interventions include the following 11 key areas:

1. 
   

   A jobs-rich industrial and economic diversification strategy focused on promoting diversification into targeted sectors, with special attention given to labour-intensive sectors and value chains [5]. Some ideas for sector strategies are contained in this policy brief by Pamela Mondliwa CCRED, University of Johannesburg (on machinery and equipment, agro-processing, and plastics), and a brief on the auto sector by Alex Mashilo. Questions are being asked as to why the industrial policy hasn’t had the desired impact. Macro-economic policy needs to support these policies and we need to ensure that serious resources and proper political leadership is mobilised behind the government’s policy commitment to industrialisation and changing the structure of the economy. Further, it would be important to develop a sector-by-sector strategy to understand the obstacles in each supply chain and unblock those.

   
   


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   Harnessing of strategic minerals for industrial development through beneficiation and other mechanisms, to leverage our commodities and transform them from a curse into an advantage. Much has been written and said about this, including proposals in the ANC SIMS report, which haven’t been taken forward. A strategy now needs to be finalised, resourced and implemented.

   
   


3. 
   

   An activist competition policy which disrupts economic concentration and promotes domestic capacity. Some progress has been made in this area. We now need to identify strategic areas where active interventions are required and the application of smart competition instruments which assist in structural economic transformation, benefit consumers and open up opportunities to smaller players. However, we cannot leave the creation of competition to competition policy alone. The attempt to de-monopolise the economy should be driven by a cross-section of policy tools. For example, competition policy alone won’t break up the banking oligopoly; it will also require the establishment of a state bank, the active promotion of local savings banks and so on.

   
   


4. 
   

   A Green New Deal: The global climate crisis and the challenges in energy are also acute in South Africa. Just as progressive forces in the US and the UK are proposing the need for a Green New Deal, which addresses climate challenges and ensures a just transition to new forms of energy and technology for workers and communities, South Africa urgently needs to have a similar discussion about strategies to manage the transition — but in our specific context of massive challenges on employment and the crisis in our public energy corporation. This policy brief by the WWF as well as this one, together with work done by organisations such as the AIDC, suggest concrete policy alternatives to take this forward.

   
   


5. 
   

   Serious investment needs to take place into innovation, R&D, digital infrastructure and skilling of workers for critical sectors, as well as growth in new industries in order to reposition our economy. This includes facilitating a just transition to new forms of technology (the “Fourth Industrial Revolution”), and the green economy. And looking at using new technology to leapfrog old technologies, for example through cellphone banking; medical IT technologies, and so on. There needs to be progress in discussions on how to provide scarce skills, but also to review whether the skills system as it currently functions needs to be restructured, or just fine-tuned. A policy brief by Stephanie Allias puts forward some views on this.

   
   


6. 
   

   A regional development strategy which actively invests in industrial capacity in the region, and co-ordinates trade and other policies to promote this objective. South Africa could become the workshop of Africa (producing capital, intermediate, and consumer goods for the region), but we need to ensure balanced and reciprocal development, to avoid a one-sided relationship which fails to develop our trading partners. This policy brief by CCRED gives an example in one sector of a regional development strategy. A regional strategy needs to include measures to support the building of regional infrastructure, reduce trade and non-trade barriers in a way that enhances decent work and spurs complementary industrial sectors between South Africa and our regional partners.

   
   


7. 
   

   A strategy to channel public and private sector investment into productive sectors of the economy (FDI would largely follow this), and to make affordable finance available to drive employment creation. This is linked to the need for a fiscal stimulus. The cutbacks in public spending have had a devastating impact on the economy. [6] Duma Gqubule proposes some ideas here.

   
   

   This increased public investment needs to support the industrialisation strategy — building economic infrastructure which supports economic diversification (rather than reinforcing the existing concentration on primary commodities) as well as building social infrastructure in areas such as housing education and health.

   
   

   A policy brief on the financial sector contains various ideas to promote financing of investment by the private sector, and proposals to combat illegal capital flight and hoarding of cash. Measures are proposed to shift away from reliance on short-term speculative flows to promoting longer-term fixed capital investment.

   
   

   The debate about the introduction of prescribed assets to direct retirement funds and the insurance sector into developmental investments remains relevant, as previous voluntary commitments (at the 2003 Nedlac Growth and Development Summit) have not been implemented.

   
   


8. 
   

   Refocusing state-owned enterprises (SOEs) and development finance institutions (DFIs) to transform our economy and improve people’s lives — beyond the era of State Capture. State Capture of SOEs has had a disastrous impact on the economy. The immediate priority is to act decisively against those responsible for looting, stabilise the SOEs and end their current paralysis. Beyond appointing the correct people to lead this process, SOE mandates need to be refocused to ensure they perform their developmental functions.

   
   

   The international evidence is clear that generally, privatisation is not the solution to these challenges, more so in a country like South Africa. The objection is not simply ideological. Predatory private sector conduct, in the context of mass poverty, will only worsen people’s lack of access to services and infrastructure which need to be publicly provided. So it is critical that we fix the SOEs both to perform their critical economic functions, and for social development. Hopefully, discussions taking place by unions and research organisations on progressive alternatives for Eskom will culminate in a fruitful engagement on a developmental alternative, as opposed to models which aim to privatise Eskom.

   
   

   Publicly owned development finance institutions (DFIs) make affordable financing available to fund investment in labour-intensive sectors in both industrialised and developing economies such as Germany, France, Japan, Korea, China, Brazil and India. These institutions can play a complementary role to private finance, precisely because they are not constrained by profit motives, and are able to take greater risk than private banks due to their public backing. This policy brief by Natalya Naqvi from SOAS, London, proposes measures to significantly scale up the impact of IDC and DBSA loans on economic diversification.

   
   


9. 
   

   Much has been written on the destructive economic and social impact of the apartheid legacy on townships and rural areas. While some commitments have been made for example by the Gauteng government to redress this, far more work is needed on how to develop and transform township and rural economies while progressively overcoming apartheid spatial divides and ensuring equitable access to land.

   
   

   This is linked to challenges of raising income and the level of demand in poor communities, as well as consideration of the viability of locating economic enterprises in township industrial parks, promoting agro-processing in rural areas, and so on. Proposals are made by Wiego here on measures to support informal economy activities, and Ebrahim-Khalil Hassen on small businesses. These are relevant both to supporting economic activity in cities, as well as township and rural areas.

   
   

   Important issues here include access to affordable finance, markets, and various forms of support. A policy brief by Ben Cousins from PLAAS at UWC looks at the possible employment impact of land reform and the transformation of agriculture. This complements the work by Ccred at UJ, linked above on agro-processing.

   
   


10. 
    

    The development of social infrastructure will support economic development and increase the social wage — through publicly provided and affordable transport, health care, housing and education. This requires the necessary budget allocations, reprioritisation of spending, as well as the institutional mechanisms to give effect to affordable, accessible services for all.

    
    

    Equal Education has put forward concrete proposals on what is required to realise this in education, based on costed norms and standards. Section 27 and IEJ are shortly releasing an analysis on the funding of health services. To fund adequate social infrastructure requires that everybody, particularly the wealthy, and corporations pay their fair share of taxes in order to fund these services. This policy brief looks at ways to increase the tax take by making our tax system more progressive.

    
    

    Quality affordable public services must be complemented by comprehensive social protection (including for the adult unemployed), as lack of income frustrates the realisation of the benefits of public goods (even if decent education is provided, hungry children can’t learn; RDP houses are built, but unemployed people sell them; and public health care is burdened by diseases of poverty). So the provision of basic income becomes an imperative if development is to happen.

    
    

    Aside from the benefits of a demand stimulus arising from income transfers, it also helps workseekers to enter the labour market, promoting job search, and skills acquisition. Proposals for a workseekers grant, BIG, or employment guarantee scheme, would provide access to a basic income.

    
    


11. 
    

    As many people point out, none of this can be achieved while the state is dysfunctional. Making significant progress in these areas requires us to build an active, capable state which intervenes strategically.

    
    

    Tackling systemic issues reproducing public and private sector corruption; prosecuting and jailing wrongdoers; and cultivating integrity in the public and private sectors must be a critical part of this strategy. Valuable policy proposals have been made on making the state “more fit for purpose”, including in recent columns of Daily Maverick. Some of the proposals in the NDP are also helpful.

    
    

    The challenge is how to maintain a rule-based public service, to ensure accountability and combat corruption while breaking the paralysis and excessive caution which stifles creativity and dynamism. Political leaders and senior officials also have a key role to play in demonstrating a selfless ethos of service and accountability, as we have seen recently with Northern Cape Premier Zamani Saul’s determination to cut frills and perks and redirect resources to urgent areas of need.

    
    

    Building an active, capable state also entails staffing it with the necessary frontline personnel needed to ensure effective service delivery, while reducing unnecessary bureaucracy. Statements about the “bloated state” are unhelpful, and unnuanced as they don’t capture the true nature of the challenge.

    
    

    Restructuring of the state needs to be evidence-based, reflecting the areas where there is an unproductive use of resources, and overspending, as well as critical areas of shortages of personnel in key services such as health, education, and policing. This policy brief on public sector employment analyses the situation, and makes policy proposals to address this challenge.

    
    

This is clearly a large and ambitious list, although these may not be the only ones for consideration. With the necessary strategic thinking, we can identify the areas in these three clusters — economic stimulus; stabilisation measures; and systemic interventions — which are the most urgent to focus on.

Priority must be given to strategic, high-impact interventions which can both begin to stimulate a virtuous economic cycle and leverage the systemic changes we need. In this way, we could start to have an economic impact which people can feel, and build greater confidence in the prospect of real change. And at the same time progressively phase in the longer-term structural changes so urgently needed.

Economic policy in the New Dawn must grasp the nettle of systemic transformation and break the current negative economic spiral. We can no longer afford to tinker around the edges. DM

[6] The cycles of growth or stagnation in the economy have been connected to the expansion, or collapse of public investment — a large increase in investment coupled with moderately expansionary macroeconomic policies in the mid-2000s saw significant economic growth; contractionary macro-economic policies between 2014-2018 combined with a decline of 18% in public investment saw a collapse in economic growth. (Duma Gqubule Business Day 14 May 2019).