Ahead of the State of the Nation Address next week, the president of trade union federation Cosatu, Zingiswa Losi, has called for an end to free market policies and a more interventionist state.
She wrote in the Sunday Times last weekend that if we are to have economic development, “an active, interventionist state is necessary.”
No reform
While there is little new in what she wrote, it does signal that the ANC and its tripartite allies, the Communist Party and Cosatu, are intent on doubling down with their policies rather than making any moves toward reform.
“Over the past quarter of a century, the government has placed its faith in free markets unfettered by state intervention,” she wrote.
“Sadly markets have been inadequate in responding to the people’s social needs and have instead created major inequalities and poverty.”
She called for increased state spending to stimulate the economy, some of it to be financed by private pension fund money. As part of a social compact between labour, business, and government, Losi wants an agreement to halt private and public sector retrenchments and the start of a mass job creation programme.
Since 1994 we have had an increasingly interventionist state, which has put us in a low growth and high unemployment trap. President Cyril Ramaphosa and his officials have constantly said that they are aiming for a “developmental state”, a sure sign that they are aiming for an increasingly interventionist state. The overwhelming evidence is that employment would be lower and poverty higher in the sort of state favoured by Cosatu.
Hardly a free market
Besides, we hardly live a free market society. State-owned enterprises have been mismanaged and looted and the state insists on wage rates which have been agreed on by unions and big business and imposed on small businesses, in the process driving up unemployment. The state lays down racial quotas for a company’s labour force. State-owned enterprises, many of them monopolies, are a clear give-away that South Africa is not the free market society that Losi imagines it to be.
Since 1994, price controls and apartheid have gone, but the economy is still a highly interventionist one. The R500 billion Covid-19 package to support the economy during the pandemic, the social grants, the bail-outs to the state-owned enterprises, and industrial policy are all substantial interventions. There are real threats to the security of property rights with proposals of expropriation without compensation and use of private pension funds at the discretion of the state.
Halt retrenchments
The Cosatu suggestion that there be an agreement to halt all retrenchments, both in the public and private sectors, would do immense damage. In South Africa the civil service is overmanned and overpaid. Public service salaries are on average higher than those in the private sector, which is unusual. In most countries public sector pay is below that of the private sector. It is unclear what Cosatu is willing to give in return for such an agreement – perhaps it would not object to pay cuts?
Greater interventionism would lead to more debt and raise the possibility of a public debt default. For the moment more interventions, such as a basic income grant or a vastly expanded public works programme, are not possible without substantial cuts elsewhere or a period of rapid economic growth.
Cosatu is correct in saying that we have underperformed, but wrong in saying that this due to free market policies. The primary reason South Africa’s growth rate has lagged way behind that of our emerging market peers is that investment levels are low by international standards. And the return on investment by the state in terms of its contribution to economic growth is well below that of the private sector.
A report written by economist Mike Schussler for Brenthurst Wealth Management points out that a key reason for the country’s poor growth is the low level of investment, as measured by gross fixed capital formation. If you do not invest you cannot grow.
Over the past decade, the world invested, on average, 22.6 percent of its total GDP every year, but for South Africa the figure is only 19.4 percent, Schussler points out. For the past decade, China has on average invested nearly 45 percent of GDP.
Investment was also low in the 1970s and 1980s due to civil unrest and sanctions and was only at reasonable levels for a short period in the early 2000s. South Africa has also underperformed world growth for the past 50 years.
Gross capital formation
Gross capital formation as a share of GDP has dropped substantially since 2009, when it was around 21 percent. Except for a few years, it has been on a long trajectory downwards and was probably only around 14 percent last year. In 2020, after accounting for depreciation, fixed capital formation turned negative. Government is investing less because it has to meet basic needs while trying to reduce debt. But public investment makes a far lower contribution to growth than that from the private sector.
Since 1994 the private sector has contributed over 68 percent of fixed investment, and the state, including state-owned enterprises, the remainder – about 32 percent. Much of government’s investment has been unproductive because of poor choice and design of projects and overall mismanagement.
The proof that investment by the state has in fact dragged down growth is that from 1994 to 2007 total factor productivity growth was above that of the median emerging market country. Total factor productivity is calculated by looking at the residual contribution to growth that is not from growth in physical investment or labour alone. This sort of productivity reflects the magic potion from good management and skills.
From 2008 to 2018 total factor productivity dropped substantially. What happened was a change in the composition of investment, with private investment dropping by 30 percent and public investment rising by ten percentage points. Since 2008 our growth rate has been largely on a declining trajectory.
And that is why an interventionist state might not be such a good idea.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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