The Political Economy of Infrastructure Funding in South Africa
No Moral & Economic Justification for Tolls
The news that the OUTA toll case had been finally thrown out and that government would proceed to rolling out tolls in Gauteng was received by the province and indeed the whole nation with a deep sense of foreboding. Across racial, class and political divides, opposition remains unanimous.
Government’s attempts to engage various institutions such as Cosatu, OUTA and others were merely a governance fulfillment act. Any outcome would always skirt around the fundamental issue. While trivialized as relating to tolls only, the real issue is around the mechanics of our macro-economic framework, especially as it relates to funding of public goods and budget deficits. Acquiescence by government to demands of scrapping tolls would have torn apart the key pillar of South Africa’s flawed IMF drawn macro-economic policy framework.
The highly recycled economic fallacy “budgetary constraints” justification for tolling roads begs crucial questions for self debunking: what other ways exist to fund social and economic infrastructure such as roads, energy, environment, ports, rail, hospitals and related public goods? And given the dearth of infrastructure needs in this country, is the toll example set by government the best way forward and is it a sustainable approach? Asked differently, how did developed and some key developing nations finance their massive infrastructure build up?
Firstly, governments are unlike households or corporations that suffer budgetary bind. Evidence below, current and historical, contradict the accepted fallacy. In the US, the mobilization against Germany and Japan that saw the country, literally from scratch, build the largest, most sophisticated and formidable war infrastructure machine ever to exist on earth. The scale of the task, from an economic perspective, was unprecedented. This feat changed not only the structure of the American economy but the entire society. The massive build-up of infrastructure was never funded by borrowing on the open markets, nor through tax payers’ money. Sovereign currency was issued.
In Canada, for over three decades, the state had been building social and economic infrastructure (seaports, rail roads etc) up until mid-70s by “borrowing” from itself, its Reserve Bank at almost zero interest rates. This is sovereign issue of money for public goods. It stopped after joining the Bank of International Settlements.
Japan, whose sovereign debt is over 230% of the GDP, has “borrowed” from its local people and itself (Its Reserve Bank, its Post Office) to the tune of 95% of total debt. It has also issued its sovereign money for public expenditure, not reliant on tax receipts. Japan, like most economies maintain the façade of complying with international banking regulations by “borrowing” money rather than creating it outright. But “borrowing” money issued by the government’s own central bank at almost zero coupon rate is the functional equivalent of the government issuing currency, particularly when the debt is just carried on the books and never paid back. The word borrow is a misnomer.
Until the EU law forced the UK to cease in 2000, the British government financed a portion of its spending through debt free money from the Bank of England. The government’s “Ways and Means” facility at the Bank of England remains open up to date. This is state created money, not state borrowing from private banks for roads etc. These practices happen in the BRICs too.
In an inconvertible currency, sovereign government expenditure is not constrained by taxes it collects. Taxes have a purpose other than what we have come to believe. Indeed, as Beardsley Ruml, the former Chairman of New York Federal Reserve Bank wrote in a journal and later addressed the American Bar Association: “Taxes for Revenue are Obsolete” showed that taxes are important for other purposes, not for financing sovereign government spending.
For a sovereign government to borrow money on the open market, as we do through our SOE’s for the purpose of public infrastructure shows how government is captured by big capital.
Politicians and most luddite economists continue to reinforce primitive ideas about money once expounded by Mrs Thatcher, namely: “The state has no source of money, other than the money people earn themselves. There is no such thing as public money. There is only taxpayers’ money”. These baseless assertions were contradicted in 2008/9 when it turned out the state, via ECB, Bank of England, the Federal Reserve and many others did have a source of money to bail out rotten private sector institutions like banks, insurance firms etc without using tax payers money. Ben Bernanke confirmed his creation of money as recent as 2 years ago. In 2003 as an economics professor at Princeton, he advocated this route.
This policy of issuing currency to finance government spending or deficits rests on very rich and irrefutable intellectual foundations. Eminent economists from both right and left wing orientations support this position. From Chicago School Nobel economist Milton Friedman, the fiercest supporter, to Harvard’s Dexter White et al. to Abba Lerner and Adair Turner. Financial Times economic columnist Martin Wolf weighed in recently. But the most crucial weight is left to non-other than the father of modern macro-economics, John Maynard Keynes. In his open letter to President Roosevelt he called for the issuing of currency to support the US economy. To cite inflation as the fear tells of a dangerously thin understanding of inflation and its management.
Thus to simplistically say, “user pays principle” applies demonstrates a highly simplistic and immature political economy. The user pay hypothesis is steeped in the morally and economically bankrupt neoliberal philosophy, which, sadly, underpins our macro-economic framework. Blind use of this principle only helps increase the price structure of this economy, putting it at a permanent competitive disadvantage to most economies. Tolls are certainly another backdoor way of privatising public goods, a theological IMF prescription.
There is thus no moral or economic reason for government to burden an already impoverished people by going the unsustainable tolling of its roads. Our SOE’s unwittingly celebrate bond issuance. Its no wonder that George Soros told the World Economic Forum in Davos that: “South Africa is in the hands of international capital” and of course they determine policy.
How long dare a nation remain insulated in its macro-economic folly?
“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” ~ John Maynard Keynes.
Wasn’t he right?