Why the development state model has worked in Asia, but not in SA and the rest of Africa

It has been 16 years since South Africa adopted the developmental state model to further industrialise the economy and to improve the quality of life of citizens in the process. 

Since 2004, several economic policies implemented by SA – most recently, the National Development Plan – mirrored policies of the Asian Tigers – Hong Kong, Singapore, South Korea and Taiwan.

Underpinning economic policies of SA and the Asian Tigers are massive infrastructure investments into rail freight to remove inefficient logistic systems, expand supply and boost demand. This model also relied on state-owned enterprises (SOEs) to be the key driver of infrastructure investments, and ultimately, economic growth.

The Asian Tigers have been largely successful with this model as they have become highly developed and industrialised. SA hasn’t had resounding success – just look at the woeful state of SOEs such as Eskom, SAA and the Passenger Rail Agency of SA. 

Why has SA (arguably) failed with the developmental state model that has made Asian Tigers major economic forces? Haroon Bhorat, a professor of economics and director of the University of Cape Town’s Development Policy Research Unit, says it all boils down to a dysfunctional state that has governance problems. 

A dysfunctional state, which hasn’t urgently improved the country’s education standards, the skill set of its citizens, or diversified the economy to be less reliant on resources/commodities, has led the country on “the wrong development path”. 

But this is not unique to SA, says Bhorat, as many countries in the rest of Africa are facing the same problems such as poor infrastructure, high energy costs and barriers to trade, which hurt economic growth and private sector investments. “These constraints [poor governance, education, skills and others] don’t exist in many Asian countries. Where they did exist, Asian countries invested very quickly and wisely in education,” says Bhorat. 

Asian countries become big economic forces

Asian countries, which were poorer than African countries in some cases, are now leading. Bhorat says South Korea was a smaller country than Ghana – in terms of gross domestic product (GDP) – shortly after the African country’s independence was declared after the 1960s. But South Korea’s GPD ($1.6-trillion in 2018) is larger than Ghana’s ($66-billion in 2018) according to World Bank figures. Bhorat says the GPD per capita (a country’s economic output relative to its population growth), of South Korea and SA during the ‘60s was “exactly the same”, but the former’s has grown more. 

Bhorat was speaking to Business Maverick editor Tim Cohen on 29 April 2020 in a webinar to launch a book called The Asian Aspiration: Why and How Africa Should Emulate Asia, which is co-authored by Greg Mills, Olusegun Obasanjo, Hailemariam Desalegn and Emily van der Merwe. 

Greg Mills, the co-author of the book and director of the Brenthurst Foundation, believes that the lack of economic development in SA and the rest of Africa has been self-imposed.

“Africa has not done well on two big things. The relationship between the government and the private sector… in Africa is very contested and predatory in its nature. You seldom hear the government celebrating the private sector.

“The second aspect is that Asia was blessed with pretty good leadership, which was backed up – not perfectly by – meritocratic institutions,” says Mills.

Bhorat agrees with Mills, saying South Korea, for example, has focused on becoming a capable state, which is backed by competent people who provide investors incentives to invest in sectors of the economy. 

“In Africa, you struggle to find capable states and optimally functioning states. I think if we look at the rapid growth story in sub-Saharan Africa. Since 2000, 17 of the fastest growing countries in the region are resource-dependent economies. You have an economy driven by a single or a couple of raw commodities and often a state that is dysfunctional. With this, there will be a low impact on poverty, much growth in corruption levels, which narrows the opportunity growth for these African economies,” he says. 

Covid-19

It doesn’t seem like many African countries will focus on becoming developmental states anytime soon because governments are distracted by efforts to limit the economic fallout of Covid-19. In responding to the pandemic, many countries will divert public finances to immediate health interventions and limit spending on economic growth-inducing initiatives such as infrastructure investments. 

Public finances will deteriorate in 2020, Bhorat warns, adding that SA’s tax revenue might decline by 15% and the budget deficit might jump from the projected 6.3% of GDP to between 15% and 20%, including the R500-billion economic and social relief package. 

As public finances deteriorate, Mills says many African countries will not “have the scope to take on more debt on favourable terms because they are already stretched”. 

“They can find themselves in an even worse position. It will be interesting what China will do with the $150-billion under the Belt and Road Initiative [a programme that offered loans/funding to several African countries in 2013 to fund their infrastructure projects]. Those loans are not going to be rescheduled and must have interest payments [when they have to be paid back]. Asia might have a big impact on us.” DM/BM