HOW CAN CAPITALISM DELIVER FOR EVERYONE IN SOUTH AFRICA?

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1 CDE-MISTRA ROUNDTABLE Joel Netshitenzhe (Executive Director: MISTRA) 29 March 2017 INTRODUCTION HOW CAN CAPITALISM DELIVER FOR EVERYONE IN SOUTH AFRICA? There are very many questions that South Africa needs to reflect on. Some of them, like today s one, are highly controversial, and so are often avoided. The question, how capitalism can deliver for everyone in South Africa, proceeds from the premise that capitalism and South African capitalism in particular can deliver for everyone! Without questioning this assumption, I wish to pose a further question: what is capitalism! This may sound strange. But perhaps it is at the core of today s discussion, precisely because there is capitalism and capitalism. Across the world, this system evinces all manner of variants. Without claiming any expertise in Political Economy, I wish to identify four such rough categories, for purposes of discussion: The Anglo-Saxon or, specifically, American model reflects in modern times a combination of as little regulation as possible with the central role of the stock exchange as a critical means of financing major economic activity and valuing assets. On its foundation emerged the TINA neoliberal model that is now in a crisis of legitimacy. The Scandinavian variant which had light touches in most of Western Europe for decades after the Second World War seeks to combine the free market with tight regulation; but critically, a system of post-tax redistribution that has attained high levels of equity. Attached to this, is state efficiency and legitimacy, and great strides in skills development. In Western Europe, as distinct from the American model, the German sub-variant does stand out. It distinguishes itself in that, for many years, it represented a bank-based rather than stockexchange-based system. The banking sector acts more deliberately as a facilitator of activity in the real economy, with banks even going into joint ventures and, more facilitatively, monitoring and intervening in the activities of commercial partners. This is besides worker representation in the two-tier Board system; and an artisan training system barely equalled anywhere. The fourth variant is the East Asian model of developmental states: historically, from Japan to South Korea, Malaysia, Singapore and so on. In this instance, the state plays a central role in giving leadership to economic development, with long-term visions and compacts, which resulted in sustained high growth over decades as well as rapid modernisation and improvement in people s quality of life. Of course, these variants had, and have, all manner of other attributes, pros and cons, as well as societal and geo-political histories which had much to do with how they evolved. The core issue is that, if South African capitalism must serve all the people in our country, it needs more expressly to identify its location among these variants, or combination of variants. Similarly,

2 2 we need to acknowledge that ours evolved as colonial and race-based capitalism; and much restructuring is required to extricate it from its historical origins. In its base documents, including the ones recently released in preparation for the coming National Conference, the ANC argues that, to attain the ideals enshrined in our Constitution, we need to combine the best attributes of a developmental state with those of social democracy. In other words, South Africa needs to sue for sustained high rates of growth of the kind attained in Southeast Asia, conjoined with redistributive mechanisms that are akin to the Scandinavian variant of capitalism. FOUNDATIONAL PRINCIPLES To come back to the theme, how capitalism can deliver for everyone in SA: it would seem that we need to reiterate a few foundational principles. The first set of these pertains to the rights contained in our Constitution. Its humanist approach and profound social content is reflected in the generations of rights that it professes: political, economic, social, environmental, gender and informational. To attain these ideals, we need a combination of structural change of the economy and inclusivity: in other words, that combination of the best attributes of developmentalism and social democracy. If you only focussed on structural change, in terms of the proportion of the various sectors in the Gross Domestic Product, we may expand the cake. But this can also go along with a reproduction of the inequalities inherited from the past. On the other hand, if pursuit of inclusivity is shorn of the need for consistently high rates of growth, this may result in a downward spiral that ends up in the sharing of poverty. Why in any case has this question about capitalism serving everyone arisen; and to be more current, why is the discourse around radical economic transformation finding resonance in society today? In part, this derives from the current poor performance of the economy for a variety of domestic and global reasons. But more critically, it relates to the historical structural features of South African capitalism which have outlived the political change of 23 years ago. Because of its origins, South African capitalism still reflects colonial features. Some refer to this as Victorian capitalism. It is trapped in a path dependency that is often referred to as the mineralsenergy complex. It has high levels of concentration and monopolisation; and small and microenterprises do not constitute as large a proportion of GDP as in comparable countries. For some 30 years, manufacturing has been in decline. At the level of the political economy, income and asset inequality has, since 1994, not been reduced. While there may have been some change in relation to the race differentials, within the races especially among Africans inequality has increased. And so, a form of racial capitalism gets entrenched. If there is anything positive about the discourse on radical economic transformation, it is that it forces all of us to reflect on how we can change the trajectory of economic growth and development, in such a way that South African capitalism delivers for everyone.

3 3 The radical in radical should therefore refer to content of policy and social outcomes as well as pace and effectiveness of implementation. Of course, we need to ensure that the language of radicalism is not appropriated to serve the interests merely of a small elite or well-connected individuals and families. But while there may be attempts by some opportunistically to use the language of radicalism, we need to accept that there is an objective basis for the impatience. At the core of this submission is the assertion that, for South African capitalism to deliver for everyone, we need an appropriate combination of structural change and inclusive growth. STRUCTURAL RECONFIGURATION What does structural change mean in actual practice? There are a few areas of focus that can be identified, and I ll try to run quickly through some of them. The first one is about how we can utilise the infrastructure programme, on which we are spending some trillion Rand every five years, not only to lower the cost of doing business and provide social infrastructure. But also, critically because such projects require all manner of supplies. Even more massive infrastructure programmes are taking place across sub-saharan Africa, estimated to require some US$200-billion of investments by the turn of the next decade. There is no reason why supplies for these projects should not be produced in South Africa and the rest of the continent. The African projects will continue for a few decades to come. As such, commercial sustainability and economies of scale can afford the region space to develop manufacturing capacity. The second area of structural change relates to the mineral endowments that the country has, estimated at some US$2-trillion Rand. Historically, as we all know, the mining industry was at the centre of South Africa s industrialisation; and it can still play that role going forward. Of course, the industry needs to modernise, from technology to skills development and labour sourcing. And, in the modern era, South Africa has to build a mature mining industrial cluster combining extraction with forward and backward linkages, including mining equipment, engineering and turnkey services within South Africa and further afield. Thirdly, while many parts of sub-saharan Africa may be experiencing challenges, oil-importing countries continue to perform very well; and some recovery is expected in the other countries. Africa Rising should survive the current blip. And as the employed and middle class expand, this should increase the opportunities for manufacturing of consumer goods within the region. Needless to say, the opportunities in sub-saharan Africa call for a clear Africa strategy on our part. The fourth area of economic restructuring relates to agriculture and agro-processing. The chapter in the National Development Plan dealing with this issue utilises research that demonstrates that a few pointed interventions can help create some 1-million new jobs by 2030 in this sector alone. What you need, among others, is the expansion of irrigated land, picking of sectors and regions with high potential, higher levels of commercial production, support for small-scale agriculture and facilitation of access to product value chains. The next area of structural change relates to focussed activity in niches in which South Africa enjoys comparative and competitive advantages, both objective and policy-driven. The Green and Ocean Economies represent such niches; as does the vehicle manufacturing cluster.

4 4 As we do all this, we need to develop the skills for modern manufacturing and services. We should prepare ourselves, through requisite research and development, and training, for the disruption of the so-called fourth industrial revolution. But there is a different dynamic that we cannot ignore. This is about opportunities in low-end manufacturing which is somewhat suited to the mass of unemployed workers South Africa has. Through appropriately-located Special Economic Zones (including IDZs and EDZs), we can take advantage of the offshoring that is currently taking place from China which, it is estimated, may release some 85 million jobs. As we may be aware, Ethiopia, Rwanda and Kenya are taking advantage of this. The unique challenge for SA is how to exploit this opportunity in low-end manufacturing in such a way that it does not result in the lowering of standards for South African workers already in decent jobs. This, in my view, is the kind of structural change that is required. Combined with a surge of the services sectors and deliberate assistance to small and micro-enterprises, this can set the country on a high and sustained growth path. Of course, many of these ideas are not new. They can be found in the NDP, the National Industrial Policy Framework and the various iterations of the Industrial Policy Action Plans. The challenge is about implementation, alignment of policy actions, sequencing, and appropriate orientation and action within the private sector. FORGING INCLUSIVITY What about inclusive growth, that other side of the coin to make capitalism deliver for everyone in South Africa? We made the point earlier that structural change on its own may result in higher growth rates and some trickle down social improvements. But this may have the effect of worsening inequality, undermining social cohesion and in fact limiting the sustenance of economic growth. The latter requires some emphasis. Research shows that longer growth spells are robustly associated with more equality in income distribution (Berg & Ostry:2011). This correlation and even causality needs underscoring: while reducing inequality is in and of itself sensible and ethical, it does have a positive impact on economic growth. It is in the context of this duality that the inclusivity of growth becomes fundamental if capitalism must deliver for everyone in South Africa. Inclusive growth should of course encompass changing the patterns of ownership. To ensure that this is more about expanded opportunities that black entrepreneurs can utilise and less about absentee shareholding, the various opportunities arising from the restructuring of the economy referred to earlier, present a unique platform for the organic and more enduring emergence of a Black entrepreneurial class in a restructuring economy. Other elements of Broad-based Black Economic Empowerment such as the demographics of the professions and management, and procurement, are also critical. All this of course requires support from the state and better performance on its part in terms of education and skills training, as well as better enforcement of empowerment codes. On the other hand, a change in culture and mindset in established enterprises is also fundamental. Further, pursuit of inclusivity should take three fundamental principles into account.

5 5 Firstly, changing the patterns of ownership should encompass workers and communities. It cannot be merely an elitist undertaking. As such, more prominence should be given to such mechanisms as Employee Share-ownership Schemes (ESOPs) and profit-sharing. The second principle is about the need to combine pre- and post-tax redistribution. Pre-tax interventions include some regulation of income differentials at enterprise and company levels. Post-tax redistribution is about progressive taxation and pro-poor fiscal spending, on which we have not done badly since This should help contain the tendency towards trickle-up economics. The third principle on inclusivity relates to the notion of a decent standard of living for all. Besides economic growth, job-creation, provision of basic services and the other matters canvassed above, two issues do stand out. One is about monopoly conduct which results in South Africa having very high mark-ups in its product markets. This has major implications for how far workers incomes can go, and for the cost of freight rail and other services. The other is about the inherited spatial dynamics with such a disjuncture between economic activity and human settlement patterns that South African workers spend up to 40% of their wages on transport, a form of apartheid tax. CONCLUSION These then are some of the interventions required to make capitalism deliver for everyone in South Africa. They are not especially novel ideas as they can be found in the NDP and the MTSF ( ). The NDP is embraced by virtually all of the social partners. But the challenge, on the part of both the public and private sectors, is one about implementation. In my view, against the backdrop of many dark clouds over the past 15 months or so, there is at least one silver lining in that the impulse for social compacting has strengthened. Co-operation around the threat of a credit ratings downgrade, and agreement on a minimum wage as well as strike balloting and so on, does indicate that we may be on the cusp of a unique moment to forge such societal co-operation. For the government, there has to be greater attention paid to improving the capabilities, effectiveness, rationality and legitimacy of the state. Single-minded focus on implementing the NDP is required; and the departmental bureaucracies and state-owned entities should act professionally and ethically, as facilitators of economic growth and development. For the business community, required are higher rates of investment and a mindset change from short-termism. Even if the government may show tendencies of weakness and confusion, the social partners should forge ahead, proceeding from the understanding that this too shall pass. Thus, we shall together build our own unique variant of capitalism that can deliver of course variously, but also decently for everyone in South Africa. END