In the first part of this article we identified key structural problems in the South African economy, emerging from a discussion of Cosatu’s panel of progressive economists. In this part we outline some thoughts on approaching the challenge of crafting policies that systematically address the problems identified in part one.
If existing economic policies have not only failed to address these problems but are also deepening them, then clearly there is the need for a radically different economic strategy.
Internationally, it is now widely accepted that the essentially neo-liberal economic policy prescriptions on which our government modelled its economic strategy in 1996 have failed and been thoroughly discredited. Partial, inconsistent and often contradictory economic policy shifts have subsequently been made in South Africa, particularly since 2003.
But those areas of progressive advance have largely been constrained and frustrated by the persistence of an inappropriate macro-economic strategy and a failure by the state to act effectively to address the problems outlined in the previous article, such as domination by the financial sector and other monopolies; the deindustrialisation of certain sectors of manufacturing; an overreliance on minerals exports and the reliance on imports to sustain our economy; the associated balance of payments problems; and the cycle of speculation and high interest rates that has entrenched itself.
Much of the failure to act decisively to address these structural problems can be ascribed to a lack of political will to take on powerful vested interests. This has led to the worst possible combination: uncertainty and timidity. A continuation of this approach will lead to our government being punished both by capital and its own mass constituency. The important political shifts that have begun post-Polokwane have now created the space to start to engage far more boldly in economic strategies that intervene decisively to develop solutions to problems in the real economy. We outline here the type of bold approach that we will be advancing at October’s economic summit of the alliance.
Central objective
The first question that needs to be addressed is: What should be the central objective of economic policy? The alliance is now agreed that the overarching objective must be to advance policies that are deliberately geared to the large-scale creation of decent work, the promotion of greater equity in society, and the eradication of poverty — that is, we need new strategies to break from the current growth path, which is reproducing inequality, low-paid and low-quality jobs, and poverty.
This overarching objective must be the yardstick against which all policies are measured, evaluated and transformed if found wanting. We now need to be brutal in applying this benchmark — commitment to these goals must not be confined to empty rhetoric. Any policies that do not meet this test must be overhauled or replaced.
This test means, among others, that strategies which produce high growth benefiting a few — but coincide with and reproduce continued high levels of infant mortality, poverty, illiteracy, casualisation, unemployment and inequality — have failed. The true test of economic policies must be that of sustainable human and social development, not narrow economic indicators such as the level of the budget deficit, or levels of profit. The policies of the alliance must aim to ensure that this is promoted by all organs and levers of state such as procurement, parastatal investment, the budget and monetary policy interventions — as well as levers of civil society such as social investment, consumer power and retirement funds.
We have inherited a development path or trajectory. The choices we make today have to confront those made in the past. Powerful industries protected in the past continue to lobby as well as incorporate the new elite. To change the development path thus means concerted actions against these interests. While the bankrupt nature of our current trajectory is now evident, if we do not take urgent actions to change, the change will happen not in a planned way, but reactive to the crises we will face. Facing up to the need for decisive action is in the long-term interests of all sections of society.
Industrialisation and economic development
The second pillar of a new economic policy agenda must be the need for broad-based industrialisation and economic development, and a break from an excessive dependence on export of raw materials, imports of machinery, equipment and consumer goods, and economic domination by the financial sector and monopolies.
Not only our industrial policy, but also our monetary, financial, fiscal, energy, human resources and trade policies need to be aligned to these objectives of focusing on the real economy. These policies need to promote actively the creation of a vibrant and diversified manufacturing industry, including new and particularly labour-intensive sectors producing not only for exports, but also for the needs of the domestic economy and the region. They also need to promote a social sector that creates sustainable livelihoods. This requires deliberate, systematic and targeted state intervention in the economy in order to change economic patterns, act against monopolies and provide alternative centres of production in strategic areas of the economy.
The challenges of a broad-based industrialisation strategy for South Africa are complex and difficult to capture in a short article, but have been elaborated upon in various Cosatu policy documents that are publicly available, as well as by progressive economists advising Cosatu.
Key among these are:
- a macro-economic framework and intervention in the financial markets to promote the type of balanced economic development tat is desired, develop the domestic market and deter speculative and unproductive economic activity;
- measures to harness the boom in commodity prices – among others, through increased taxation — and to invest the ”resources dividend” intelligently;
- active intervention through sector strategies to promote the growth of labour-intensive sectors, and to support labour-intensive industries that are under threat;
- measures to promote and compel the beneficiation or manufacturing of our minerals and other raw materials into value-added products;
- the alignment of trade policy and its subordination to the overall goals of promoting broad-based industrialisation, protecting vulnerable sectors, building capacity to develop new areas of manufacturing and so forth;
- a coherent strategy to develop cooperatives in all sectors of the economy, both rural and urban, on a large scale such as we see in Venezuela today, and the harnessing of retirement funds for social investment;
- the adoption of various instruments that have been successfully used internationally to discipline firms beyond the current narrow focus on competition policy;
- the establishment or expansion of state ownership in strategic sectors, such as the financial, fuel, energy, agroprocessing, steel, ICT and mining sectors;
- use of the state budget, state procurement and investments by parastatals such as Transnet and development finance institutions such as the Industrial Development Corporation and Land Bank to promote deliberately particular types of economic activity; and
- measures to improve living standards and organisation of the working poor, and to act against atypical employment and casualisation.
Cosatu’s 2006 industrial strategy document outlines detailed information on a number of these issues, which are being developed further.
In all of this, an environmentally appropriate and sustainable economic strategy is no longer a nice-to-have. The energy crisis, issues of global warming and so forth, as well as the devastation of communities by inappropriate development, mean that the approach of ”growth at all costs” cannot be blindly pursued. It is, after all, working people who pay the highest price for such ”development”.
Creative policy development, such as in the area of alternative energy sources, and regionally focused trade and production strategies can be sensitive to these realities while promoting the job-creating and redistributive growth path our country so desperately needs. Nevertheless, rapid industrial development will always throw up tensions in terms of broader environmental and social concerns, which have to be consciously addressed.
In addition, it has become obvious that no economic policy can be sustainable without integrating — at its core — a strategy to ensure fuel, energy and food security. Various proposals have been made in this regard, but more work needs to be done in this area, given current international and domestic challenges.
Regional development
The third economic pillar is the need for a regional development strategy. A sustainable growth path is one that must recognise South Africa’s integrated position within Southern Africa. We need to build regional institutions proactively to invest in growth, which will support diversified exports of South Africa. We need demand growth in the region for our success. We need to consider investing a proportion of resource earnings the region — as the region grows, so will sustainable employment in South Africa.
Investing in the development of the region as a whole is part of our responsibility. The international fuel and energy crisis creates an opportunity and challenge to shift our trade patterns. A regional industrial strategy could make South Africa a hub for intermediate products, capital equipment and consumer durables, as opposed to the current one-sided export strategy.
Investment
The fourth pillar of a new economic policy should be an investment strategy that channels private, public and socially owned capital into productive investment, infrastructure and the development of people — while acting against speculation and disinvestment.
Despite the real concerns about low levels of savings and investment in the economy, the reality is that vast quantities of capital are lying idle, being channelled into speculative activity or misdirected to mega-capital-intensive projects, golfing estates and glass buildings, or channelled out of the country at a time when our people are crying out for real investment in communities and jobs.
Various mechanisms have been proposed by us and others to address this misallocation of resources, including:
- the reintroduction of legislated, prescribed asset requirements compelling the huge funds that control nearly R2-trillion in workers’ assets, including the state-owned Public investment Commission (PIC), to direct a certain portion of their investments into socially productive investment, for example through government bonds with guaranteed returns;
- capital controls to regulate speculative activity, including through the introduction of ”speed bumps” that impose a tax on short-term capital flows; and
- possible tax and other incentives for socially productive investment, including the use of lower interest rates for certain investments.
Measures to channel socially owned capital include greater control by retirement-fund members over the investment strategy of their funds, state assistance to promote co-ops (including financial and agricultural co-ops), programmes to encourage communities to invest in local production, and the provision of infrastructural, financial and other facilities for small traders.
Large volumes of public capital are available to be channelled through state budgets, procurement and parastatal investment — this requires a clear strategic framework to marshal these resources for economic development, and Cosatu has proposed criteria for prioritising such investments. A specific focus is needed on ensuring that the financial sector finances development — through legislative compulsion if necessary, as happened in East Asia — as well as the creation of public financial institutions that can play this role. Banks need to be subjected to greater regulation, with more detailed reporting requirements.
Monetary policy
The fifth pillar is a monetary policy that is attuned to development imperatives. Current monetary policy revolves around two problematic elements:
- the use of interest rates as a blunt instrument to achieve a rigid inflation target, despite the inability of this crude mechanism to impact on external factors; and
- the reliance on high interest rates to maintain short-term capital inflows.
We need to develop a monetary policy — and Reserve Bank — that uses multiple tools to combat excessive inflation while promoting employment and growth as part of a new mandate.
Instruments that have been used successfully internationally need to be carefully considered and applied to deal with our challenges. These include:
- the use of differential interest rates — high rates to deter certain economic activity, and low rates to promote investment, employment, low-cost housing and so forth;
- the introduction of higher reserve requirements for banks, to curb excessive credit; and
- active management of the exchange rate to pursue our industrial and other strategies, curbing imports and promoting local production and exports.
This gives monetary policy a radically different orientation from the narrow inflation-targeting model that Stiglitz has described as a ”disaster”. Our real interest rates need to be reduced to the same level as, or lower than, those of our trading partners.
At the same time, targeted strategies are required to complement monetary strategy in order to deal with inflationary pressures that can’t be dealt with by the Reserve Bank alone. These include measures to act against monopolistic import parity pricing in sectors such as fuel, steel and agriculture.
Coherent strategies are needed to lower food and fuel costs, through agrarian reform, competition policy and other interventions, as well as strategies to lower the cost of administered prices of public goods, particularly for working people and poor communities.
Unlike the recent boom driven by excessive credit and conspicuous consumption, which is unsustainable, an increase in living standards for the majority of our people, although introducing different types of inflationary pressures, could be offset by:
- the benefits of rising productivity of the economy;
- measures to contain food inflation (which constitutes the bulk of poor people’s spending);
- the economic injection to local communities; and
- the fact that increased spending of the poor will mostly be on basic commodities, which are more likely to be locally produced and labour intensive than imported luxuries. This type of consumption is more sustainable, promotes development and employment, and is less vulnerable to the boom/bust cycle fuelled by excessive credit.
Fiscal policy
Sixthly comes the realignment of our fiscal policy and its integration into a new economic strategy. Currently fiscal policy is technocratically driven, essentially the preserve of the Treasury, and unduly focused on chasing macro-economic targets such as low budget deficits, with inadequate attention paid to how fiscal policy can target resources in a way that transforms the economy, promotes employment and redistribution, and builds the capacity of the state to play its role effectively.
As a result, there is a complete mismatch between the way in which the fiscus is approached and the developmental goals to which the government has committed itself. This lack of strategic focus has resulted in underfunding in critical areas, chronic shortages in key delivery personnel and infrastructure, a lack of resourcing of economic programmes (including industrial policy) and the diversion of resources to inappropriate areas, such as mega projects, arms deals and pebble-bed nuclear reactors.
A realigned fiscal policy would need to invert the current one-sided focus on low budget deficits/surpluses and rather use state expenditure to promote developmental objectives, with macro-economic variables, such as tax:GDP ratios, deficits and so forth being dynamically aligned with society’s developmental requirements.
This may see such ratios rising or falling over particular periods (for example, a longer -term strategy may mean using higher deficits to finance investment, which then results in the type of economic growth that brings a reduction of deficits for a period), with the fiscal strategy being pursued primarily to promote the development of society and equitable growth of the economy.
An urgent task is to identify critical areas of shortage and areas of spending that need to be prioritised. This needs to be done in the run-up to the 2009 budget, and Parliament and civil society must engage to determine a new fiscal agenda.
This will enable the type of ”zero-based budgeting” approach proposed in the Reconstruction and Development Programme, which foresaw that departmental allocations wouldn’t be based simply on incremental allocations on top of existing budgets. Rather, budgets should be determined by programmes and critical needs, including adequate expenditure to ensure critical service personnel, economic infrastructure and social delivery.
Further, a detailed discussion is required to develop a progressive tax system that promotes equity and growth. Cosatu has tabled a number of proposals in this regard. In addition to equity considerations, taxation needs to promote particular types of developmental economic activity, and to deter harmful trends identified in part one of this article.
Finally, instead of constantly lamenting the ”lack of state capacity” and the erroneous expectation that delivery depends on the private sector, we need a new mindset that sees the proper resourcing of the state and investment in capacity as a national priority, including at local government level.
State institutions
A seventh pillar should be the alignment of all state institutions to pursue these new objectives of economic policy. Unlike today, where departments and state institutions often pursue disconnected and sometimes contradictory goals, there has to be effective coordination throughout the state, and indeed society.
This is one lesson of societies pursuing massive development projects, whether in East Asia, the European Marshall plan or new democracies in Latin America today. This requires all state institutions, and society more broadly, to function differently. It is both a political and technical coordination exercise, and requires a mobilised and active civil society.
Like East Asia, we need powerful planning and technical coordination capacity. Unlike the East Asian model, we want to build a democratic developmental state, which requires the unleashing of our people’s energies in advancing these objectives. So we need a programme of social mobilisation around our development agenda.
At the level of state coordination, we require a number of things: Firstly the creation of an economic planning centre in the state — either a ministry or a centre in the Presidency — to ensure proper coordination and supervision of state departments and institutions around a coherent economic vision, including medium- and long-range economic plans.
Secondly, the current model of the Treasury subordinating other government departments to its narrow objectives (and frustrating or even defying government policy) needs to be replaced by an appropriately redefined and re-aligned role for it.
Thirdly, the current scenario of state institutions and parastatals being a law unto themselves must come to an end. A clear and transparent mandate needs to be given to all state institutions, in the context of an overarching development protocol, and measures put in place to ensure proper supervision and accountability. This requires, among others, the overhauling and democratisation of all boards, as well as the introduction of tighter reporting requirements and meaningful oversight.
There needs to be a review of whether the current structure of these institutions is conducive to such accountability; whether corporatisation, for example, has undermined this; and therefore what changes are needed.
Finally, recent problematic experiences with various regulators (such as that of electricity), being beyond public accountability, raises the issue of whether the state can effectively pursue its economic policy objectives under a scenario of agentisation, and whether this model doesn’t need to be reviewed.
Rural development and agrarian reform
The eighth key pillar is that of rural development and agrarian reform. A large proportion of our people continue to live in rural areas (approximately 40%). The current crisis of poverty and destitution in rural areas, mass migration into urban centres and the crisis of food security underline the importance of a coherent strategy to create sustainable livelihoods in rural areas, and to ensure the production of affordable food.
The ANC’s resolution on rural development at Polokwane contains detailed proposals that question the government’s current minimalist approach to rural development, and it is a useful basis for moving forward. The current situation of entire communities subsisting mainly on remittances from families and social welfare grants is not sustainable.
A rural development strategy, while having land reform as its centrepiece, would also need to incorporate other key elements such as:
- affordable financing to promote economic development;
- support programmes and training to assist co-ops and small enterprises;
- public-sector ventures;
- strategies to develop appropriate industries, including light manufacturing, handicrafts, services, tourism and others; and
- putting in place the necessary economic infrastructure, including IT services, roads and rail.
A programme for land and agrarian reform needs to look not only at questions of redistribution, but also at forms of land ownership, the role of public and communal versus private ownership of land, and the role of small farmers versus that of large farmers (white or black).
The programme of land and agrarian reform must aim to ensure:
- sustainable livelihoods of ordinary rural people on the land;
- the promotion of food security and affordable food prices;
- the effective use of state land, and the role of state support in promoting small-scale farming, including through public financial institutions;
- measures to ensure large-scale farmers produce affordable food for the domestic market;
- the establishment of, and support for, agricultural co-ops;
- the rehabilitation of land, and environmental protection; and
- steps to prevent the over-concentration of land, regardless of its demographic ownership.
A special focus is required on the position of farming communities living on ”white farms”, measures to deal with evictions, and the continuation of semi-feudal relations on the farms; and a strategy to ensure that farm workers and their families retain, or gain, secure access to productive land.
The recent crisis of high food prices shows clearly that, to be effective, a strategy for food security will need to act against the cartels in the agroprocessing and distribution sector; provide for an active role for the state, possibly in the distribution and production of basic food; and create incentives for the production of affordable food for the domestic market, by large and small producers.
Social protection
The ninth pillar of a new economic strategy needs to look at the provision of comprehensive social protection. It is important to see that social protection is not welfare, as traditionally understood.
Providing universal access to affordable basic services, income support and assets has both an economic and social logic:
- housing, transport, education and other social policies must aim to construct liveable communities that are accessible to work opportunities;
- healthcare and electricity and water provision promote economic productivity as well as decent lives; and
- comprehensive social security provides a basic income for people, which enables them to participate in various forms of economic activity.
This is why the concept of comprehensive social protection advanced by the Taylor committee is not only a social necessity, but also an economic imperative that unleashes people’s creativity and human potential, rather than locking them into a cycle of poverty and dependence.
This requires the public and universal provision of affordable public services in all these areas. Particularly critical here is affordable public healthcare, accessible and well-located housing and affordable and quality education. ”Affordable” means, among others, that agreement is required on what is considered to be an adequate level of free basic services, and a progressive cost structure that cross-subsidises the poor. ”Public” means the development of high-quality systems to ensure public, rather than profit-driven, provision of basic needs, and the phasing-out of private-sector dominance in key areas such as health, transport, education and housing. Where the rich opt out of public systems, this reduces the scope for social solidarity.
The widely touted issue of skills and human resource development, while not a panacea, needs to play an important role in the restructuring of our economy. The notion of ”active labour-market policies” in which our human resources are skilled and retrained only makes proper sense in a context where people actually have a prospect of being absorbed in that labour market. Therefore the HR strategy needs to be aligned with a focused strategy to empower people to engage in new areas of economic activity, combined with a greater recognition of skills and prior learning of those already employed.
Finally, universal income support means that unlike the current situation, everybody should enjoy this support as a right, and no person should fall through the cracks. Current proposals for comprehensive retirement provision don’t address this need since millions, particularly unemployed adults of working age, are still left without any form of income. Therefore the need for a basic income grant, or a similar scheme, remains imperative.