Policy Failure on a Colossal Scale

by | Apr 9, 2015 | Blog | 0 comments

Sleepwalking into a Revolution

Before the financial crisis, the South African economy was growing at about 5%, and averaged about 4% since 1994. Credited with a political miracle of 1994, an economic miracle was insight, and so we hoped. Touted as the a paragon of macro-economic prudence, the country was lauded by London, Washington and their influential financial institutions as vindication of the success of the IMF influenced and backed economic policies enshrined in the “non-negotiable” GEAR. The hope was that growth in GDP would redound to the benefit of all citizens by way of reduction in unemployment, poverty and inequality. But who benefited from this growth?

A closer look at this growth revealed that the financial services sector grew at phenomenal paces of about 8% while the rest of the economy ambled at an average rate of about 3%. The sector outpaced manufacturing to be the largest contributor to GDP. Growth was entirely jobless. Joblessness increased. As GDP was surging to over 5% after 2004, South Africa was eclipsing Brazil as the most unequal economy on earth. The economy was deepening its rentier character.

Of the BRICS economies, South Africa was the worst affected by the financial crisis. The crisis helped lay bare the structure of the economy and the pile of sand upon which it is built- a highly financialised and a rentier economy. Five years into the crisis, the economy remains fickle, wobbly and of little promise. South Africa has, it appears, learnt nothing from the crisis.  What we are being loudly told is that what ails the economy is largely its labour protection laws. We are told that there is no lack of analysis, but the will to act!

Two decades into democracy the outcomes of our economic system and its policy framework are unambiguous: increased poverty, increased inequality, increased unemployment, escalating costs of living and doing business. How else does one measure the success of any economic model if not on its ability to provide sustainable increases in the well-being to the majority of its citizens? If it does not, as is so abundantly clear, why should a people continue to labour under such a system with such outcomes-even when there is impressive economic growth?

Attributing such dreadful outcomes to labour laws, policy uncertainty and infrastructure constraints smacks of intellectual poverty, political naivety and leadership vacuity on the part of the nation. To make matters worse, we have drawn up a 20 year national development plan- based on the same failed policies, backed by the same Bretton Woods institutions. We are told to pile our hopes on this plan. The recent midterm budget speech elevates the NDP and evangelizes growth. We are all praying and wishfully thinking that miraculously we will be able to turn things around by following the same failed economic policies. It surely calls for a great deal of collective blind faith to think this way. The nation as a whole appears to have been shackled to this faith based ideological hubris: neo-liberalism!

While political and business dominant elites don’t see themselves as acting ideologically and react with hostility when ideological labels are pinned on them, the fact remains that this current economic model, whatever its name, is a disaster and will consistently yield negative outcomes, even if we were to grow beyond 5%.

It may be intellectually discomforting for those in power to accept they have failed the nation by blindly adopting this economic model. With social ferment across the nation, the current economic model has become a serious national security risk. How can the whole nation allow its key policies to be subtly dictated or defined by foreign institutions and governments and their domestic cheerleaders whose interests are at variance from the nation’s?

There have been all manner of opinions in recent days, including editorials that support their positions by citing the recent IMF & World Bank reports which say structural reforms are needed, and that there is policy uncertainty! Labour laws, we are told almost daily, are the biggest culprit that hold growth, discourage employment and reduce competitiveness.  When a nation debates policy- especially against neo-liberalism, we are told there is policy uncertainty. “Political uncertainty” is a myth, it is a fallacious doctrine that has no ground. As Nobel economist Paul Krugman says, “it’s a debunked doctrine”, just like austerity.

In regard to labour, there is no credible empirical evidence whatsoever that supports the view that labour protection laws increase unemployment, nor do minimum wage demands. This is the conclusion of a majority of studies. As recent as 2012, the OECD released a 223 page report on growth policies and concluded that employment protection laws have no effect of any significance at all. The same report reveals that of the 40 OECD countries- South Africa included in this count even though not an OECD member, ranks number 5, as one with the weakest labour protection laws after the US, Canada, UK and New Zealand. Germany – home of BMW ranks more than 20 places behind South Africa. This is empirical evidence, not policy smoke and mirrors that appear to characterise editorials and opinion pieces in this country.

Hiding behind the overused shibboleth “structural reforms” to force nations to accept their oft disastrous policy prescriptions such as the labour so as to advance their neoliberal agenda- including using rating agencies, the Breton Woods institutions were and are at the centre of promoting what Nobel economist Prof Joe Stiglitz calls “market fundamentalism”. Even Dominique Straus-Khan, former head of IMF remarked that the universal applicability of policy prescriptions by these institutions have been put to bed by the crisis- and further observed that the crisis has “devastated the intellectual foundations of the their global economic order…” so adherently supported by these institutions. Indeed, they are so intellectually paralysed now that they can’t even formally suggest a reversal of their failed systems, let alone forge a post crisis economic order that eliminates developmental challenges but rather continually recycle unsound “structural reforms” prescriptions which are a code for removing worker protection rights and stagnating or reducing wages. SA needs economic reforms now, and perhaps structural reforms later.

Confronted with these outcomes caused by our failed policies, how do we forge our way out of this quagmire? There cannot be a fitting time than now- even though we squandered the Mangaung conference of the 100 year old ANC.

The first point of call is the financial system. Reforming our monetary and banking system- including institutions thereof is urgent and vital. The current system is not only inherently anti-developmental, it is highly incompatible and permanently at tension with the need for sustained industrial and social development at a mass scale. It is further inconsistent with the need to create a viable, progressive and more egalitarian society that can underwrite social stability.

Secondly, our macroeconomic policy framework is a relic of the defunct gold standard. It’s a fiat currency world. This should have changed at independence in 1994. This conceptual failure is the primary impediment to full employment and equity. As captured by a leading British economist “The power to issue its own money, to make drafts on its own central bank is the main thing that defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or a colony”, Wynne Godley, 1992. We need urgent monetary and fiscal re-orientation, not tax reforms.

Full employment must necessarily be the central goal of policy, not growth. Growth has yielded unemployment. In fact, growth in South Africa is growth in economic rent and in private and sovereign indebtedness.  Furthermore, we should review the manner in which we embrace and manage globalisation. Poor management of globalisation can singularly rout or build an economy. For example, pragmatic leadership in Malaysia defied the IMF and successfully imposed capital controls during the Asian crisis. Malaysia triumphed and the IMF later u-turned and supported Malaysia.

As a nation, we cannot wait for calamitous events or sufficiently threatening events to produce consensus on the need for deep policy changes. Aren’t the events there on the horizons anyway? An urgent call to action is made here. An economic imbizo should be urgently convened.

As one Barack Hussein Obama aptly put it, “we cannot rebuild this economy on the same pile of sand”.

Indeed, unless there are fundamental reforms of our economic model, the “hope for a better life for all” will be an indefinitely deferred hope. Revolution could follow.

Redge Nkosi: Founder & Executive Director of Firstsource Money and Public Banking of South Africa. He has previously worked for both central government and private sector. His intellectual focus is in Macroeconomics, Money & Banking & Development Economics. His last qualification is an MBA.