A combination of external and internal factors will make the next few years difficult for South Africa to navigate. As highlighted at the 2017 World Economic Forum in Davos, a continued weak global economic outlook, rising global inequality, and the emergence of populism and economic nationalism (illustrated through Brexit and Trump), bring a number of risks for emerging economies such as South Africa’s which are highly dependent on external sources of capital and markets, and do not have the technology base to take advantage of the fourth industrial revolution.
Back home, the 1994 national consensus has reached its limit.
This bargain entailed a political and class compromise which (1) safe-guarded the interests of the existing (white) economic elite, (2) created a new black elite primarily through state employment and rents, (3) put in place a robust system of democratic accountability; (4) provided a more secure and regulated labour market for the organised working class, and (5) established a comprehensive system of fiscal redistribution for the poor (i.e. welfare).
There is no doubt that the 1994 consensus – especially the welfare spending component – brought significant social returns in reducing extreme poverty and vulnerability, and extending access to basic services. And there is also no question that our robust system of accountability and the democratic institutions we have established provide critical checks and balances to those entrusted with the means of state administration and coercion.
But we must accept that the 1994 consensus has become unviable and is unravelling. Sustained low rates of economic growth – more pronounced since 2008 and predicted to continue over the next few years – have limited the fiscal income that can be redistributed.
Inequality has not reduced, ownership of the economy remains highly concentrated, and higher economic returns continue to accrue to those already endowed with capital and skills. Our poor education and training outcomes haven’t helped, despite the not insignificant per capita spending on education.
The ambitious project of creating a developmental state to transform the apartheid economy has been hamstrung by the absence of the necessary coherence and capability, as well as patronage and corruption associated with rents controlled by the state.
Short termism and populism are on the rise, fed by the growing restlessness of our people who are not blind to the obscene inequality that abounds and who are losing hope in a future of shared prosperity.
We need a paradigm shift, underpinned by a new consensus – a new bargain around which the state, business, labour and civil society can cohere – to move us out of our low growth and high inequality trap. We must not be naïve and think this will be easy to achieve.
This paper examines our low growth-high inequality trap, and proposes a set of policy prescripts to escape the trap. The paper argues that these policy prescripts need to form the basis of a new social bargain, a contract for inclusive growth, which will serve to protect the economy from the worst risks of the current global turbulence, while putting a set of new measures in place to fire up the economy in a manner that more deliberately reduces inequality.
First, though, a conceptual framework is needed to better understand the causal determinants of growth and inequality traps, and what must be done to break these traps.
2. A conceptual framework to tackle growth and inequality traps
Four fundamental points about inequality and the economy need to be made to frame our approach to addressing inequality in South Africa.
High levels of inequality are bad for growth
For decades, mainstream economists tended to argue that there is a trade-off between economic equality and economic efficiency. Over the last decade or two, this view has been over-turned with a growing perspective that inequality is bad for growth (see for example Deininger and Squire, 1998 and Ostry, 2014).
Deininger and Squire’s study is particularly revealing for us here in South Africa in its finding that there is a strong negative correlation between inequality in asset distribution (proxied by land ownership) and growth. In their study, only two of the 15 developing countries sampled with a Gini coefficient for the distribution of land in excess of 70 managed to grow at more than 2.5% average over the 1960 to 1992 period. In the South African case, there can be no doubt that our extremely high levels of inherited asset inequality are bad for growth.
Even the International Monetary Fund is now in agreement that inequality is bad for growth. Researchers such as Ostry (2014) argue that inequality undermines growth, and that countries thaat have been able to achieve sustained levels of high growth generally have lower levels of inequality. Poverty traps in the lower quintiles of a population reduce aggregate demand, continued education inequalities limit the human capacity required for a rapidly growing economy, and high levels of asset and wealth inequalities cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of major shocks.
In recent discussions of the “secular stagnation” of western economies since the global financial crisis of 2008 several leading US economists (such as Stiglitz, Summers and DeLong) have argued that rising inequality is the primary cause of the present stagnation of Western economies (see, for example, DeLong, 2017).
In this they go back to the work of the popular English economist JA Hobson who argued that rising inequality would depress consumption demand and generate a surplus of savings (since the rich have a lower propensity to consume than the poor).
Real investment spending would also weaken in the face of stagnant consumer demand. (After spending time in South Africa during the war of 1899-1902 Hobson used this “under-consumptionist” argument to explain the economic basis of imperialism. This argument was later taken up by Lenin in his famous 1916 pamphlet on imperialism).
In addition to the depressing effects of inequality on aggregate demand, several other “channels” whereby inequality reduces growth have been confirmed, such as inequality causing political instability that reduces growth (see Alesina and Perotti, 1995); high inequality that weakens the middle class consensus which reduces growth (see Easterly, 2001); inequality fuelling corruption that is growth-reducing (see Alesina and Angeletos, 2005) and financialisation and its growth-reducing and inequality-increasing effects (see, for example, Assa, 2012).
Global financialisation is, of course, the dominant feature of the current neoliberal era. Financialisation refers both to the increasing relative size of the finance sector itself and the dominance of non-financial corporations by finance (and the consequent drive to maximise short-term shareholder value). Financialisation increases inequality through the high returns on financial capital, and through increasingly high salaries paid to senior employees (as detailed by Piketty). Financialisation also reduces growth by diverting capital from real productive investment (where low skill and middle skill jobs can be created) into speculative financial investment.
Growth, in itself, does not necessarily reduce inequality
Does growth reduce inequality? Much of the literature from the 1950’s was influenced by Kuznets’ hypothesis that inequality increases with income growth in the early stages of development and only decreases in the later stages. But the Kuznets hypothesis has now been discredited: the correlation between growth and changes in inequality is now seen to differ from country to country, depending on initial structural conditions and differing policy stances. In some countries growth has taken place with simultaneous inequality reduction (eg a number of South East Asian countries), while in others growth has been associated with rising inequality (a number of commodity-exporting African and middle-eastern countries).
Reviewing the literature, and by no means exhaustive, the key variables which determine the extent to which inequality will be reduced by growth include:
» The relative size of the fiscal redistribution package – in country cases where relatively high social wage expenditure exists, growth has an inequality reducing impact (through increased state revenue funding increased fiscal redistribution);
» Levels of education inequality – the higher the levels of education inequality, the less likely growth will be inequality reducing, with benefits disproportionately accruing to the better educated;
» The relative size of the middle class – countries with relatively smaller middle classes (less than 40% of income) and extreme wealth disparities between the elites and the poor tend to reproduce these extreme inequalities with growth;
» The employment-intensity of the growth – capital-intensive growth has tended to increase inequality, especially in country cases with high initial unemployment;
» The extent to which productivity growth accompanies economic growth, which enables wage-led inequality reduction;
» The extent to which the structure of capital is concentrated, with high levels of concentration often deepening inequality with growth;
» The extent of financialisation – in which the rates of return of capital in highly financialised capitalist economies, exceeds the rate of growth, increasing wealth and income inequalities (as elaborated by Piketty);
» The extent to which wealth is generated through rent-seeking, as opposed to value-adding productive activity; and
» The extent of corruption, with higher levels of corruption crowding out investment, reducing the fiscal redistribution package, and reducing state capacity to tackle inequality.
So in different countries, the combination of these variables influences the extent to which growth potentially benefits the poor and previously dispossessed. In the South African context, it is only really the country’s expansive fiscal redistribution programme that ensures that the poor will benefit from growth. All other variables – high capital concentration, financialisation, rent-seeking, capital intensity, the small middle class, and high education inequality – point to continued high levels of inequality, even when the economy grows.
Growth is still important for inequality reduction
But because growth, in itself, will not necessarily reduce inequality, this should not be taken to mean that growth is unimportant for inequality reduction. Growth both expands the fiscal resources available for redistribution as well as potentially expanding employment and business opportunities for the non-rich. So growth is a necessary, but not a sufficient condition for inequality reduction that simultaneously reduces levels of poverty.
Where redistribution happens in a stagnant economy, both the rich and poor are adversely affected. International comparative experience indicates that the redistribution of assets impacts most on the welfare of the poor when accompanied by increased aggregate investment. So in contexts where aggregate investment is in decline, even where inequality may be reduced, levels of poverty will also likely increase (as a result of reduced fiscal redistribution, rising unemployment etc).
Growth must be accompanied by economic transformation (inclusive growth)
Fiscal redistribution programmes (progressive taxation, health, education, welfare and housing) play a critical role in reducing extreme poverty, and do have an inequality-reducing impact. Similarly asset redistribution programmes (such as land reform), and regulatory measures (such as broad-based black economic empowerment), also have some inequality-reducing impact. But these impacts are minimal if the causal determinants of inequality – rooted in the structures of the economy – are not simultaneously transformed.
This point is picked up in the South African Communist Party’s “Going to the root. A radical second phase of the [national democratic revolution]” (2014), in which it is argued that South Africa’s redistribution programme over the past 20 years – as important as it has been – was not matched with measures to transform the systemic features of the country’s economy. This de-link between redistribution and production has undermined the impacts of redistribution both on inequality and growth.
Perry Anderson (2011), in his assessment of Lula’s Brazil, makes a similar argument. Despite the enormous successes (such as poverty reduction) associated with Lula’s extensive fiscal redistribution programmes and succession of minimum wage increases, Lula did not succeed in restructuring the economy to make it more inclusive. Instead, in ways that mirror South Africa, Lula’s fiscal redistribution triumphs were matched somewhat with industrial regression. Reflecting Brazil’s subordinate position in global technologically driven value chains, the last 20 years have seen a continuous shift away from value-adding industrial sectors towards the financial sector and resource-based extraction. Again, in ways similar to South Africa, this has created new vulnerabilities as weak commodities demand and fickle financial inflows now threaten the sustainability of Brazil’s fiscal redistribution package in the post-Lula conjuncture.
Policy focus should not be reduced – as a zero sum game – to redistributing existing assets as an end in its own right. Redistribution outcomes must be better linked to production outcomes to have sustained economic impact.
And redistribution measures – where they are most effective – must take a dynamic view of the economy, and where new assets and wealth are being (or can be) created. In this sense, redistribution measures should be a core component of industrial policy (redistributive industrial policy).
Similarly, redistribution measures must take account of the real factors that exclude the poor and previously dispossessed from accumulating wealth. This includes access to capital, productive assets (which includes land), skills, markets, and, in the context of the fourth industrial revolution – technology, that excludes the poor and previously dispossessed from the means to generate wealth.
It is this ownership of capital and technology, as well as access to markets, that perpetuates (and even exacerbates) class inequality as well as spatial inequality (between countries as well as regions within countries) associated with uneven development.
Policy responses to combat inequality therefore have to move beyond the usual approaches of fiscal redistribution and asset redistribution, to include measures that provide the poor and previously dispossessed with access to productivity enhancing capital, skills, technology and markets.
This becomes the core business of the developmental state, which must continually seek ways to create wealth (through investment and growth) but at the same time offset the tendencies towards concentration and rising inequality.
3. Understanding the low growth high inequality trap in South Africa
Twenty two years after democracy, South Africa remains with obscene levels of inequality:
» The wealthiest 10% of the population own more than 90% of all wealth and more than 55% of income;
» The next 40% of the population – the group that is often considered to be the middle class – earn about 30% to 35% (less than 50% generally elsewhere) of all income, but less than 10% of the wealth; and
» The poorest 50% of the population, who earn about 10% of all income, own little- to- no measurable wealth.
There is no doubt that South Africa’s massive inherited asset and wealth inequality is a major impediment to growth. In this sense, high inequality and low growth co-exist in a vicious cycle, each reinforcing the other.
South Africa’s extraordinarily high levels of inequality have their roots in the colonial crimes of conquest, dispossession and apartheid oppression, which currently explains the close correlation between class and race inequality.
Since 1994, South Africa has implemented what is the largest welfare programme in Africa, with relatively higher rates of fiscal redistribution than countries like Brazil, Chile, Columbia, Indonesia and Mexico. We have also redistributed assets (primarily land) although not in a manner that has dented asset inequality, and have adopted a range of regulatory measures aimed at addressing race inequality (such as affirmative action, preferential procurement and Broad-Based Black Economic Empowerment).
But inequality remains, and in all likelihood is rising. This is because inequality is rooted and reproduced in the structure of the economy, which we need to understand if we are to transform.
Historically white monopoly capital played a core role in reproducing South Africa’s highly unequal economy (built around the minerals-energy-complex). In the mid-1980s, some 83% of JSE shares were owned by four giant companies, all owned by white South Africans, who controlled economic activity in mining, finance, the industrial sector, agri-business and retail.
Today, nine of the 10 richest South Africans are still white men, but to say that the structure of capital has remained unchanged misses some core tendencies associated with the globalisation of the past few decades (see for example van der Walt, 2016, who in spite of his anarchistic leanings provides some useful analysis on the structure of South African capital).
These tendencies include:
» First, our large conglomerates have unbundled (Anglo for example now has a mostly mining focus and has shed holdings in other sectors). This has contributed directly to manufacturing disinvestment and loss of capability in key value chains.
» Second, some of the largest segments of white monopoly capital have globalised, with primary share listings in foreign stock exchanges, and massive interests and investments elsewhere in the world (far surpassing their interests in South Africa). The reality is that much of our big capital is less patriotic and more mobile than we think, which has enormous implications for how we engage capital to retain and expand current investment.
» Third, as an upshot of the same liberalised capital controls that allowed our large conglomerates to export capital and list abroad, private capital in our economy is now significantly foreign owned (just under 40% of JSE capitalisation and 50% of the JSE top 40 is foreign owned). As a related matter, much of our government debt (approximately 40%) is also financed through foreign savings (which is why we take our investment status and related costs of borrowing seriously).
» Fourth, in line with global trends since the 1980s, capital in South Africa has increasingly financialised. The finance, real estate and business services sector now accounts for 20% of GDP, and a startling 53% of PAYE payments in 2014-2015, indicating the very high wages in this high skills sector (the second largest sector PAYE payments contributor is Government at 19%). The financialisation of capital in South Africa has directly fuelled income inequality, and has redirected capital away from productive investment (where low and semi-skilled jobs could have been created). Financialised capital is also more mobile, and easier to disinvest.
»Fifth, SA’s increased integration with global finance capital has also fuelled inequality through increasing share prices on the JSE; circumscribed policy options to deal with inequality (because of risks of capital flight), and increased our exposure to global financial shocks.
» Finally, the over-simplification of reducing our capital structure to white monopoly capital draws attention away from the by no means insignificant role of state capital in the South African economy – owning and controlling approximately 30% of the economy in highly strategic sectors such as state banking, information technology, energy, transport, aerospace and the weapons industry, communication, among others. In addition the state owns about 25% of land, and has an array of regulatory and administrative apparatus to influence the behaviour of capital. There is also the question of pension funds and union investment funds, which currently play and could be geared to play an even more strategic role in the economy.
So what are the implications of this understanding for growth and transformation?
» Many of the challenges we face are not peculiar to South Africa (although more negatively impacted because of high initial conditions of inequality and unemployment). Globally, foreign-based big capital is driven by short term shareholder maximisation, and ownership traded in highly liquid markets. This seriously limits our ability to draw this capital into a national development project.
» This does not mean that we cannot leverage any big capital. Capital has different degrees of mobility depending on, for example, their dependence on a fixed resource and investment in fixed capital. This is important to recognise as part of the project of developing patriotic capital.
» Much of the big capital that is referred to as monopoly capital operates in highly competitive global markets (through which we derive important export benefits).
» There is still rampant monopolisation in some domestic markets, eg. processed food, financial services, construction, private healthcare, as well as state markets (such as ports and electricity). Here institutions such as the Competition Commission need to be given teeth and resources.
» A significant component of new growth and employment will come from small and medium sized firms (not big capital). The focus should not be only on the restructuring of big capital as part of our transformation programme.
» Transformation should not be reduced to black rent-seeking replacing white rent seeking. Economic transformation cannot be reduced to simply increasing black ownership of the large JSE-listed corporations and the corresponding reduction of South African white and foreign ownership. Even if this could be accomplished without disruptions (such as capital flight), it will not reduce overall inequality in the economy. What is required is fundamental restructuring of the economy, in which rent-seeking is incrementally replaced by the development of new productive capabilities in which the previously disposed have a correspondingly high share.
4. The global response
South Africa is far from unique in being stuck in an high inequality-low growth trap, but because of our extreme inequality and political realities the trap is even more glaring and relevant here than elsewhere.
A recent paper on “Restarting the global economy” (Michael Spence et al, 2015) argues that “there is a strong argument that current trends (of rising income inequality) will be detrimental to both the demand and supply sides of economic growth, indeed a drag on future growth. In many countries this implies that “new deals” in political economy terms need to be discussed”.
Spence et al argue that three sets of actions are necessary to restart the global economy:
» A coordinated global fiscal stimulus to aggregate demand (as done by G20 in 2008-09)
» Channel exorbitantly large pools of global liquidity into infrastructure for a rapidly urbanising world, using multilateral risk mitigation methods.
» Mechanisms to ensure wider and intergenerational sharing of the benefits of future technological advances and global integration (such as better quality education for low-income households).
The global growth model of 1980 to 2007 (often referred to as neo-liberalism), based on globalisation, liberalisation of trade and capital flows, financial sector deregulation, monetarism and fiscal austerity, has stopped generating inclusive economic growth. The main global outcomes now are rising inequality, financialisation, deindustrialisation, stagnant household incomes and increasing social discontent. This is now increasingly recognised, even by the enforcers of this global growth model themselves (the IMF).
But just as the multi-lateral institutions increasingly acknowledge that inequality must be addressed, we are witnessing a resurgence of populist and nationalist economic politics (such as Brexit and Trump), which will make coordinated multilateral responses (as proposed by Spence et al) more unlikely. The new international politics also create real risks of reduced access to markets, capital and technology for emerging markets such as South Africa.
This unfavourable global development outlook means that a country like South Africa needs to be especially astute and focused to negotiate the turbulent times ahead. South Africa is worryingly vulnerable in the current conjuncture, given its high levels of dependency on foreign commodity markets and foreign portfolio inflows.
5. A new consensus for inclusive growth
This co-incidence of unfavourable global conditions and the growing recognition that we are stuck in a high inequality-low growth trap, implies that we urgently construct a new consensus to transform the economy towards more equal and higher growth.
It is proposed that this new consensus cultivate three new national obsessions around which a critical mass in society – within the state, higher education sector, business sector both established and new, labour and civil society (including the media) – can be mobilised behind supporting a number of policy choices that rapidly transition the economy out of its low growth and high inequality trajectory. These three national obsessions, cascaded down to community level, and built on dialogue and strategic trade-offs, should form the basis of the new consensus for growth with transformation.
The new consensus for inclusive growth is built on the understanding, anchored in the conceptual framework in section 2 above, that economic growth without transformation will reproduce and exacerbate inequalities which in itself will make this growth unsustainable; and transformation without growth, will lead to less investment, jobs and wealth to redistribute, which in itself will likewise trigger elite conflict, making any consensus impossible to manage. The essence of the three national obsessions which make up the new consensus are drawn in the main from existing policy frameworks such as the NDP, NGP, IPAP, our 9-point plan etc (we are not short of good plans), but with new points of emphasis, synergy, and governance arrangements.
5.1 A national obsession with inclusive growth, based on fostering new logistics and technological capabilities that will grow employment, incomes and exports.
South Africa remains locked-in to a capital intensive, energy intensive, and highly financialised historic growth path that (a) reproduces self- serving rent-seeking by the old white, foreign owned and new black rentier classes (b) is too dependent on financial inflows and commodity booms, making the economy extremely vulnerable to global shocks; (c) creates very little new wealth in the productive economy; and (d) excludes large numbers of South Africans from participating eithers as owners of capital or as employees.
The economy is long overdue for transformation and reform. Most economic players would agree on this – the point of debate being what exactly should change, and how should this be achieved?
Two elements of inclusive growth must be unlocked.
(1) Firstly, we need as a matter of urgency to more deliberately diversify the economy away from “fickle capital inflows and commodity booms” (to quote Rodrik, 2015), through identifying new sectors and industries in which we could be competitive, leverage investment, and rapidly grow output and jobs.
The selection of key sectors and industries should be made in collaboration with the private sector on the basis of several criteria, including:
» Existing size (select larger sectors to ensure meaningful impact);
» Lower barriers to entry for new start-ups;
» Growth potential (again for greater impact);
» Labour intensity;
» Export and import-substituting intensity (because of the current account imbalance); and
» Potential competitiveness that can be unlocked (it is pointless to focus on industries in which we are not or cannot be competitive).
Provisionally, and not precluding what will emerge with the intensive consultative engagement which must happen with the private sector, the following sectors and industries have been identified:
» The mining and energy sector (including downstream industries, renewables and gas);
» The infrastructure value chain (leveraging off Africa’s big build programme, and through accelerating the crowding-in of private investment into jointly financed economic infrastructure);
» The ocean economy value chain (including aquaculture, off-shore bunkering, ship building and repair);
» The agriculture value chain (particularly export-intensive and labour-intensive horticulture);
» Advanced export manufacturing (anchored in local supply chains, new technological capabilities, and new logistics capabilities);
» Light manufacturing, including the clothing and footwear industry, both for export and domestic consumption; and
» International tourism (including health tourism), leveraging off our exchange rate advantage.
The approach should be to identify and resolve broader constraints to competitiveness and investment (costs and reliable supply of electricity, port-handling and other logistics costs, costs of broadband etc), as well as specific obstacles to growth and investment in the seven sectors and industries identified above (skills, regulations, infrastructure, finance etc). These should be identified and resolved in collaboration with the private sector in each area. New investment incentives (with the necessary fiscal instruments) should be developed to unlock investment flows. In addition, a new obsession with R&D and technology development and application must be nurtured, working with our HEIs, DST and the science councils. The necessary fiscal instruments for this must be developed with urgency. The finance sector (including pension funds) needs to be intensely engaged to redirect new resources for productive capital expansion, including venture capital for technology development and start-ups. Key to this could be more effective use of instruments such as directed finance and prescribed assets.
(2) Secondly, we need a fresh approach and set of practical measures to combat exclusion. Following Hausman (2015), our approach to inclusivity must move beyond just regulating inclusion (BBBEE etc) and focusing on state sector markets (preferential procurement etc), towards addressing the actual productivity constraints faced by new entrant firms and start-ups owned by the previously dispossessed. Here the state (working with existing corporates) needs to level the playing fields by connecting these start-ups with productivity-enhancing inputs and networks. This includes (a) access to capital (through DFIs, venture capital funds, investment partnerships with established players etc), (b) access to technology (through innovation and technology parks, incubators, technology transfer incentives with established players); (c) access to efficient and cost effective logistics and ICT connectivity (including free wi-fi); (d) access to cost-effective inputs (supplies, including technical skills); (e) access to ongoing business support and mentoring; and (f) access to markets (export support, off-takes, competition reform). Importantly, these support measures can’t be random and generalised, but must be specifically tailored to opportunities in identified and prioritised sectors and industries. The established private sector, which could act either as an enabler or a player that constrains barriers to entry, must be engaged and reoriented through a set of appropriate incentives and sanctions. This will be at the heart of the industry level compacts that need to be negotiated as part of the consensus for inclusive growth.
5.2 A national obsession with constructing a state that is stronger, more capable and less corrupt.
The second national obsession we need to cultivate as part of the new consensus for inclusive growth relates to state capability and orientation.
To start, this must of necessity include inculcating renewed leadership vigour across political formations as well as business, labour and civil society to fix the economy. Without a new vision of where we are going, without a new model of economic governance, and the necessary coherence, co-ordinating capacity, and accountability, the new consensus that is being proposed will be still born.
The difficulties of implementing effective policy are clearly set out in “Theory and Practice of Industrial Policy: Evidence from the Latin American Experience” (Wilson Peres, 2007). Peres argues that elaborate policies are often barely implemented, due to the lack of political will and insufficient attention to translating policy intent into specific instruments, as well as institutional capacity and budgetary resources. Our record of executing policy and plans, especially over terms of government, suggests much room for improvement. Key to this will be to put more emphasis on execution planning, project management, risk management, monitoring and escalation (to address bottlenecks).
Our emphasis on strengthening policy execution should not be taken to mean that theory and strategic reflection is no longer important. This can lead to dangerous tendencies of anti-intellectualism, often associated with the rise of populism. Without theory and strategy, our practice runs the risk of being misdirected and not focused on addressing the causal determinants of low growth and high inequality. What it needed is for theory to always find expression in praxis – in this case in practical and scalable interventions which can simultaneously rebuild investment confidence while addressing economic exclusion. This is at the heart of the industry level compacts that need to be assembled and enabled.
Specific state reforms required for the implementation of this new consensus proposed policy package to drive private sector growth and employment could include the following:
» Continuing with fiscal consolidation and strict management of macro-economic risks which threaten national sovereignty. This includes the continued imposition of tighter fiscal expenditure ceilings and deficit targets; cost containment measures that do not effect service delivery; and far stricter controls over cost of employees (including its reduction as a share of budget over the medium term). Importantly, this must be seen as a national priority, and championed beyond Treasury.
» More decisive management of our state-owned companies (Eskom, SAA, Transnet, post office etc), both to limit contingent liability risks and to reorient towards better serving the national economic agenda (as elaborated in this new consensus for inclusive growth). Here we need to move away from overly ideological positions which are at times being used to serve and protect rent-seeking interests (masquerading as some kind of redistributive outcome), towards pragmatic solutions to particular problems. State intervention and ownership is highly necessary to correct market failure, and rebalance the playing fields towards the previously dispossessed. But we need to be alert to state failure, and cognisant of the veiled interests that underpin some state decision-making. Where SOCs are using their monopoly positions in value chains to crowd out private investment and reinforce uncompetitive pricing, we need to take the same approach as with private cartels. The much needed unbundling of Eskom is a case in point.
» Addressing the current account deficit through targeted export support (industrial support should be more focused on export industries: SEZ incentives, infrastructure, training, R&D etc); addressing transfer pricing issues (particularly of the mining companies); and imposing higher taxes on luxury imports
» Strengthened state capabilities in critical areas such as industrial policy implementation, public investment structuring, transaction and project management, finance sector restructuring, among others
» Sustained and increased public investment to promote growth and industrial diversification, while being much more rigorous in the selection, design and implementation of public investment projects to support economic development. Specifically we need to develop a public investment pipeline that:
• Maximises support to employment creation and export industries
• Is competitively priced (international bench-marking and control of cost overruns)
• Offers the most scope for crowding-in private investment.
• Abandons or cancels investments that do not fit the bill
» Budget baselines need to be revisited to redirect fiscal resources to grow the productive economy. New fiscal and tax instruments need to be developed to enable this.
5.3 A national obsession with improving the quality of public education and training, to achieve the first two.
Good quality basic education is both a development goal itself and a crucial ingredient of economic development. Good quality basic education is crucial to the supply of skills necessary to run a modern, complex, competitive and expanding industrial economy.
Basic education (numeracy, literacy, and other cognitive skills) are essential to vocational skilling. A broken education/skills pipeline (with resulting scarce skills) has four major consequences:
» First, high income returns to skills exacerbates income inequality
» Second, high returns to skills reduces competitiveness with countries that do not suffer from scarce skills
» Third, shortages of skilled workers are a constraint on sustainable industrialisation
» Fourth, the shortage of skilled workers reduces the effectiveness of government bureaucracies
The Education/Skills pipeline in South Africa is broken and needs to be fixed as a central component of the new consensus for inclusive growth. The system directly reproduces social inequality through streaming learners from poor rural and township schools (and TVET colleges) towards unemployment, while streaming the children of elites towards highly paid professional and technical vocations.
Despite the relatively high fiscal allocations to the sector, our basic education system has very poor learner outcomes by international comparison (in literacy, numeracy, problem solving and especially maths and science). This requires a new national obsession with fixing our broken education and skills pipeline. Core elements include:
» Increasing resources to Early Childhood development which is critical to cognitive development;
» Strengthening school performance monitoring and accountability;
» Competency testing of school principals and teachers;
» Importing maths and science teachers as necessary;
» A vigorous programme for teacher re-training and development;
» Empowering parents and communities to hold schools accountable for learner performance ;
» Radically improving the management of the basic education system (eradicate inefficiencies in scholar transport, nutrition support, learner materials, infrastructure, teacher deployment etc);
» Revisit the 2011 Basic Education Accord (2011) to assess progress and confirm priorities and commitments;
» Revisit the 2011 National Skills Accord (July 2011) to assess artisan and internship take-up by private sector and state entities;
» Reconfigure the post-schooling vocation system to align the TVETs and SETAs to industry skills requirements; and
» Providing free higher education to those who cannot afford it, and foregrounding the restructuring of the HE sector in a more dynamic understanding of the future economy.
This paper has attempted to provide some insights into South Africa’s low growth and high inequality trap. Globally we are entering a period of uncertainty with the rise of populism and economic nationalism. At home, our 1994 consensus has run its course, and needs to be refreshed with a new consensus that has immediate and practical application. Unemployment is stubbornly high, and growth is stagnant, threatening to limit the existing fiscal redistribution programme of government. Inequality has not reduced. Inequality reducing measures of government, including fiscal redistribution, regulatory interventions such as BBBEE, and asset redistribution (land reform) have had marginal impact on inequality. This is because inequality is rooted in the structure and functioning of the economy, meaning that we can only really address inequality through radical economic reform. Learning from the experience of Brazil and South Africa itself over the past 22 years, growth (and related fiscal redistribution) without transforming the structure of the economy, will not significantly reduce inequality.
Importantly, the paper argued that the current conjuncture is not about a choice between transformation or growth. Instead, we need growth with transformation (referred to in the paper as inclusive growth).
Growth without transformation will exacerbate inequality, lead to increasing social tensions, and provide fertile grounds for the rise of populism.
Transformation without growth will be accompanied by disinvestment, rising unemployment, and less wealth and assets to redistribute.
Decreased state revenue will lead to reduced fiscal redistribution (for example on social welfare). Simply put, without growth, transformation will make us poorer, without transformation, growth will exacerbate inequality which will make the growth itself unsustainable.
Key to this will be to deconcentrate ownership and cartel behaviour (both in private and state sectors), disincentivise rent-seeking, and reorient the finance sector to incentivise financial flows to the productive sector, and in particular firms that are investing and have competitive capabilities to grow and increase employment and exports.
At the centre of the new consensus for inclusive growth must be expanded redistribution that simultaneously grows investment, and supports growth and restructuring of the productive economy. BBBEE and land reform cannot simply be about ownership transfer, but must grow productive capacity (investment, output, jobs, exports etc).
Also key will be upscaled investment in human capability, as well as a range of innovative measures that address productivity constraints of firms and start-ups (access to technology, skills, costs of logistics, etc). Firms operating in underdeveloped spatial areas (former bantustans, townships etc) must be enabled to connect to productivity-enhancing inputs and networks. Productivity increases, over time, will also allow for higher wages, stimulating aggregate demand.
Such a consensus will not be easy to broker, given the vested interest in the current status quo. Visionary leadership capable of mobilising support across interests and sectors and managing spoilers is required to stand up. We have no choice.
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