A tale of three policies

| Gilad Isaacs
Pravin Gordhan - World Economic Forum Annual Meeting. Photo by Wikipedia under CC ASA 2.0 Generic.

The ANC is increasingly accused of breaking the promises it has made to the South African public. What is less widely discussed is how their promises contradict one another.

This is particularly true of economic policy, where the ANC’s promises conflict sharply with the policies of government. Even more confusing, different government policies contradict each other, and the policies on paper are not always the same as the ones government puts into practice. This is the inconsistency of policies, promises and actions.

This confusion can be seen when we try to answer three questions: What should drive growth in the South African economy? What is the role of the state in achieving growth? And what type of macroeconomic policies will achieve this?

Growing the South African economy

The South African economy faces two fundamental and related problems.

Firstly, business and government have not invested enough money in new or developing businesses. In democratic South Africa, investment has averaged at 17% of South Africa’s total economic output – the Gross Domestic Product or GDP. However, to achieve the levels of growth the country needs, we need to invest at least 25% of GDP in new and expanding business.

Secondly, the economy is heavily concentrated around mining, industries linked to mining, energy, and finance. Traditionally, the driver of economic growth in developing countries has been the manufacturing sector but manufacturing is weak in South Africa, except for industries that are linked to mining. In general, the economy favours business over workers, and large businesses in particular. Profits in South Africa are significantly higher than other places in the world. This is the current structure and growth path of the economy.

At the 2012 Mangaung Conference, the ANC decided that “radical policies” were needed to “transform the structure of the economy”. At the conference, and in the ANC’s 2014 Election Manifesto, the party endorsed the National Development Plan (NDP) as the way to achieve this transformation and “eradicate poverty, create full employment and reduce inequality”.

How to achieve these objectives has been hotly debated.

A number of government policies call for it to support the growth of industry, particularly manufacturing (“reindustrialisation”), and away from its focus on minerals and finance (“diversification”). The most prominent are the New Growth Path (NGP) and Industrial Policy Action Plan (IPAP). There is a lot of evidence to support the importance of such an approach.

On the other hand, the NDP does not mention reindustrialisation, the NGP or IPAP. In fact its proposals directly oppose such approaches. The NDP focuses first on growing the economy and worries about making it more equal later (if ever).

In the NDP most of the projected 11 million jobs to be created by 2030 will come from small businesses and be in the informal sector (like street trading), domestic work and the service sector (the portion of the economy that doesn’t make things but offers services like transport, call centres, finance etc.). It has been well documented that there is absolutely no local or international evidence to support this approach.

This difference of approach affects the lives of millions of South Africans, particularly the poor. Other government policies (like the NGP and IPAP) focus on creating “decent jobs” (well-paid, secure and safe employment), which the NDP discards in favour of low-wage, insecure jobs. In addition the NDP pushes strongly for weakening or removing rules that protect workers.

The irony is that the ANC has promised decent jobs and reindustrialisation and to implement the NDP, despite the direct conflict between the two approaches. In practice, conservative policies like those of the NDP have been implemented and government has made little progress towards expanding jobs.

The Democratic Developmental State?

Pursuing the creation of a “democratic developmental state” has become a popular slogan in the ANC and government. A “developmental state” is a strong state with political legitimacy that intervenes heavily in the economy to pursue a developmental agenda. A developmental agenda would be one that aims to grow the economy in a sustainable manner by providing decent jobs and reducing poverty and inequality. ANC promises often refer to this sort of “developmental state”.

The “developmental state” described in government policy documents is very different. These promote a strong state capable of implementing government policy, but the “developmental agenda” is reduced to just creating an environment that is good for business and private investment.

This goes to the heart of the debate over the extent to which the state should intervene in the economy. The conservative “free-market” position of government, seen in the NDP, is that the private sector will generously decide to invest so long as they are given the right regulation, some encouragement, and business-orientated public infrastructure. This thinking has guided many aspects of government policy over the last two decades without generating the necessary investment.

Taking a rather different approach the ANC’s 2014 election manifesto continues to promise government intervention to direct the economy towards reindustrialisation, greater local use of our mineral wealth, the reorientation of the financial sector away from speculation and towards supporting industry, and pursuing macroeconomic policies that support employment and reduce inequality and poverty. But the ANC’s manifesto still emphasises mining and related industries and it is unclear what other industries will be supported. It is therefore doubtful that this programme will transform the current structure of the economy.

In practice the government is yet to implement policies that make South Africa a developmental state, and macroeconomic policy has held this back.

The role of macroeconomic policy

Macroeconomic policy is concerned with the economy as a whole. It focuses on general issues such as national income, the rate of growth, GDP and unemployment. It regulates government spending and debt, inflation, the exchange rate and the financial sector.

In practice the ANC government has pursued very “free-market” conservative macroeconomic policies. These have focused on low inflation, low government debt and minimal regulation of the financial market. Once again, the logic behind this is that private businesses (local and international) will invest if government creates the right conditions. However, the promised investment has failed to appear. Instead this policy has reinforced the existing structure of the economy and growth path, and favoured big business, especially finance.

The ANC’s 2014 election manifesto promises “macroeconomic policy that contributes to addressing unemployment, poverty and inequality”. However, read more closely, it is largely more of what already exists, since it continues to give priority to low inflation and low government debt.

Economic policy is often confusing to ordinary people, but these questions are vitally important for transforming the economy in a manner that benefits the poor majority. Without a policy for growth that focuses on expanding industry and is focused on decent jobs for the poor, a strong state that actively directs the economy towards developmental objectives, and macroeconomic policy that supports these policies, we cannot begin to tackle unemployment, inequality and poverty. For now we are saddled with an ANC whose policies, promises and actions don’t add up.

TOPICS:  Economy Politics

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