THE ROAD TO FUNDAMENTAL ECONOMIC CHANGE

Any proper, and truly progressive, diagnosis of the South African economic malady must begin with an appreciation of the path dependency of economic outcomes. Poverty begets poverty, inequality is unyielding and the unemployed find no pathways into the economy. These conditions are transmitted across generations. It is a vicious cycle that began with colonisation. The first two and a half decade of democratic rule have seen an improvement in people’s living conditions. A small proportion of the formerly oppressed have achieved economic security through their energies and talents, or through taking full advantage of the avenues of enrichment and cronyism. But the fundamental character of the economy remains the same. It is extractive with a small productive base, with high barriers to meaningful economic activity and is stuck on a low growth trajectory.

This malady can also be characterised as a middle-income trap. South Africa has been classified, on a GDP per capita basis, as a middle-income country since the 1960s. It has failed to make the transition to a high-income country in the mould of the likes of South Korea and Japan. How can it, when most of its population is hobbled? The term middle income is also deceptive in our circumstances; average income is not a meaningful metric in a highly unequal society.

Against this historical background, and considering the present circumstances, economic discourse has turned to the use of macroeconomic tools. Questions are being asked whether South Africa has the right monetary policy framework. A good number of commentators call for the fiscus to pump more money into this ailing economy. These are not unreasonable propositions.

But will they cure patient? Here is one who presents with heart failure, and the medical practitioners are quibbling about first aid.

No doubt fiscal and monetary tools can be used to change the fortunes of an economy. The distinction between macroeconomic and microeconomic tools is also not clear-cut, and they are (or can be) mutually reinforcing. But macroeconomic levers are largely tools of economic management, they are not the tools of fundamental transformation.

That fine art of managing aggregate demand or manipulating supply conditions through interest rates, money supply or spending, has been used to great effect in many countries. From Keynes to Geithner, the case has been made for managing recessions great and small, drawing on this toolkit. This has worked to great effect in economies hovering close to full employment, with mass economic participation, and a long history of economic independence.

Since the financial crisis, South Africa ramped up its public spending, leading to a substantial increase in debt (and debt service costs) but making little dent on unemployment, poverty and inequality. In an economy with stronger foundations, such as the United States, such fiscal stimulus would have led to greater production and growth (as was the case there). Whereas in South Africa, greater expenditure, without challenging the underpinnings of the economy, does not raise the economy’s productive potential or help more citizens to become self-sufficient.

Economics recognises that most developing economies do not need mere management. They bear different burdens from those experiencing occasional slumps and crises. Many, like South Africa, have not enjoyed the luxury of organic development over long periods of time, driven by internal needs. Our countries were violently inserted into an economic world order skewed against our development, driven by the imperatives of imperial powers. They suffer from a dependence that results from being positioned as the providers of raw materials and free or cheap labour. This positioning, and the pathologies that come with it, require a different response.

Development economics emerged out of this realisation that pumping more money or loosening monetary conditions in a dysfunctional economy can only have limited effect. Not surprisingly, most development economists, thinkers like Amartya Sen, Dani Rodrik, Angus Deaton, Daron Acemoglu, Stefan Dercon, Justin Lin and Esther Duflo direct themselves to questions of the microeconomy: how human capabilities are generated, how to build a productive (industrial) base, how to integrate meaningful into the global economy, how to develop institutions that thwart rent-seeking, and similar questions. This is not to say that other economic disciplines do not address these questions, but that the dearth of genuine developmental discourse in South Africa frustrates efforts of proper diagnosis and solution-making. Indeed, the much mainstream discourse revolves around the financial sector and its legitimate but narrow concerns.

This piece should not be read as encouragement to superficial radicalism – the type that produces rent-seeking and leaves the majority of the people without enduring productive capacity. That type would not spell a rupture from the past, but dependence of another kind, no longer to foreign capitals and colonialists, but to patronage barons. This is rather a call for a developmental discourse with the aim of decisively elevating the country and its people to economic empowerment.

What is to be done? Current realities require an urgent response to boost consumer and business confidence, and to keep the vulnerable from failing deeper into the throes of poverty and marginalisation. A stimulus or recovery package provides such a response. Its effectiveness will depend on its ability to draw resources towards initiatives that are labour intensive, address infrastructural needs and boost local economies. Such a package should also support the confidence needed to unlock private sector resources that exist in the economy but have not been deployed because the prospects of earning returns have been uncertain. Governance and anti-corruption reforms will help to address this lack of confidence, as will increasing the efficiency and effectiveness of government.

But ours is a deep-rooted economic challenge that can only be solved by building human capabilities, removing barriers to entry into the economy, achieving spatial integration and building a resilient productive base. This cannot be reduced to a matter of macro-economic management, important as that might be.

It requires a fundamental re-engineering of the economy, based on sound but deep micro-economic transformation. This work would focus on building human capabilities (driving education, training and health outcomes), reducing barriers to economic participation (through promoting connectivity in all its manifestations, stronger competition regulation, targeted development finance and incentives), boosting the productive base of the economy (sharper industrial policy, leveraging local procurement effectively, promoring export competitiveness and taking advantage of regional opportunities) and promoting labour intensity (through sectors that are prioritised and the nature of incentives).  This then becomes the basis of a long-term economic strategy that breaks path dependence and achieves structural change.

By Trudi Makhaya,  Economist.

Posted in Viewpoints.

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