Our extraordinary Professor Peet Strydom recently wrote us a review of Prof Raymond Parsons’ new book Zumanomics Revisited.
Zumanomics Revisited is a different book from the 2009 edition of “Zumanomics” that comprised a large number of essays on the South African economy edited by Raymond Parsons. The present edition is the vision of one author on the future of the political economy of South Africa. It is an independent assessment of the current state of the economy with a vision of the likely future political economy developments if the policy proposals of the National Development Plan (NDP) are implemented. There is a close relation between the exposition followed by Parsons and that of the NDP. This is explained by the fact that the NDP is an economic-political document based on a synthesis between opposing views. The NDP does not subscribe to a particular political or economic ideology. It presents its analysis and policy proposals from an ideological neutral position. In this respect its policy proposals presuppose a synthesis. It is this feature that qualifies the NDP as a unique policy document that could be implemented without wasting time on diverging ideological debates. Put differently, the implementation of the NDP requires leadership not ideological debates. This is the major theme of Zumaeconomics version two. In this sense this book projects an optimistic vision of the South African trajectory towards 2030. This is an important stance that requires strong defence in a country that is showing features of optimism fatigue with a failing public sector.
The starting point of the exposition on the South African economy is the international economy. This country is an open economy with a long tradition in international trade, going back to being an important link between East-West trade during the 17th century. International trade and global capital flows have played an important role in the development of this country and they are still important segments of the economy. The financial crisis of 2007 and the great recession that followed affected the economy adversely. Our stable and well developed financial sector enabled us to escape the devastating financial effects that were evident in many countries. Nevertheless, South Africa entered a recession from December 2007 to August 2009. The slow economic recovery that followed is falling short of the country’s growth potential. Moreover, the growth performance is falling behind that in other emerging economies, particularly major African countries. As indicated on p. 8 this discrepancy in growth performance is an important challenge because if this country fails in achieving its growth potential on a sustainable basis it runs the risk of losing out on the African growth benefits.
This book analyses the disappointing growth performance very convincingly within the framework of five deficits, namely, the social deficit; the fiscal deficit; the trade deficit; and the trust deficit. The author applied this formal framework very effectively in identifying the major problems in the economy and the corrective policy measures.
The social deficit refers to issues of unemployment, poverty and income inequality. These issues have been dominating the local development debates for many years and they have been researched extensively. Moreover, the NDP addresses them in detail. The lack of progress in resolving these issues is not a matter of lacking analytical understanding but political unwillingness, a lack of political capacity or a combination of both to implement corrective measures.
The exposition on the fiscal deficit reveals several existing and emerging problems that require the treasury’s urgent attention. As indicated by the author fiscal reforms played an important role in establishing a sustainable fiscal stance in this country after 1994. Counter-cyclical policy during the recession triggered rising budget deficits that appear to be difficult to reverse. Consequently, the rising government debt is putting the sustainable fiscal stance at risk. In 2012 rating agencies lowered the country’s sovereign debt rating. The pressures on the sustainable fiscal stance are not only the result of counter-cyclical policies but, as indicated by the author, primarily because of structural fiscal imbalances. They are partly related to the obsession of fiscal policy with redistribution. Approximately 16 million South Africans receive social grants and although we are aware of the significant contribution of these grants to poverty relief it is evident that these unconditional grants are not sustainable. Long-term solutions such as skills development and employment opportunities are more sustainable options.
The author signalled the anti-growth composition of public expenditure in the sense that expenditure is biased towards consumption while capital expenditure lags behind. Moreover, capital expenditure restraint signals the widening gap between existing and required infrastructure. The emphasis on consumption expenditure opens the way for extensive wastage of public funds. The author refers explicitly to unauthorised expenditure and expenditure in excess of approved budgets. It appears that the treasury lacks an effective framework to control expenditure growth.
The complementary analysis of expenditure is income. The author gives a critical assessment of the present tax system that relies heavily on income taxation, particularly personal income tax. This implies a narrow tax base together with high marginal tax rates. The government has consistently resisted any increase in the value added tax rate because of its regressive effect on income distribution. Rigid political thinking can have negative outcomes on fiscal sustainability.
All in all it appears that achieving a sustainable fiscal stance in South Africa is not easily within reach of the present institutional arrangements. The commendable review of fiscal issues in this book could probably be seen as a wakeup call that fiscal policy could be heading towards the slippery slope of an unsustainable fiscal stance.
The trade deficit addresses trade and trade policies, the BRICS and the challenge of a rising growth horizon in Africa. As indicated by the author, South Africa’s trade performance is disappointing in several respects. There is, for instance, the recessionary effect on Eurozone imports. Similarly, several emerging countries are experiencing an economic slowdown. The sustained appreciation of the rand exchange rate during the early phase of the present economic recovery inhibited export growth. Probably more important is the volatile exchange rate pattern of the rand that makes it difficult for exporters to establish sustainable export markets.
There are, nevertheless, explicit government policy actions that inhibit our export performance. Unfortunately certain critical policies have escaped the analysis and should be mentioned here. The author mentions that South Africa failed to benefit fully from the commodity boom (p. 73). It should be emphasised that government interventionist policies regarding licencing, royalties, taxation and the mismanagement of prospecting rights in the mining industry played an important disruptive role in the expansion of the industry. Moreover, there have been uncertainties regarding government’s position on the nationalisation of the mines. There were also important long-term delays and capacity constraints in the delivery of coal exports by the official government carrier to the RCT in Richards Bay.
Foreign trade has been discouraged by the sharp slowdown in trade liberalisation and closely related to this is contradictory tariff policies in terms of particular product categories by the Department of Trade and Industries (DTI).
South African manufacturing is often criticised for its lack of competitiveness in global markets. This condition is not independent of the industry-wide wage bargaining policies. To this could be added other labour market rigidities that are cost enhancing, particularly in manufacturing industry.
South Africa’s foreign trade policy is directly linked with the Industrial Policy Action Plans of the DTI. A closer analysis of these policies reveals an emphasis on industry clusters for industrial development. Many of these clusters are unlikely to survive without extensive protectionist policies. Moreover, one identifies industries that are associated with low wage countries. South Africa with its rigid labour market is unlikely to be competitive in respect of such industries. One also identifies industries that rely on highly skilled technologies that do not comply with our largely unskilled labour force, coupled with an under-performing education system.
These critical comments are based on conventional trade theory. If we expose these trade and industrial policies to new developments in trade theory they appear to be heading in the wrong direction. The latest research emphasises the role of firms in international trade as opposed to industries. Moreover, new developments in trade patterns contradict these policies because it would appear that traded commodities are increasingly composed of intermediate goods. The outcome of this exposition suggests that there appears to be a wide gap between the proposed trade and industrial policies and conditions in the real world.
The delivery deficit is well presented and highlights the vast gap between real world conditions and expectations that the ANC government has raised amongst ordinary people. The delivery failure is probably worse at the local level in terms of housing, basic services such as clean water, sewerage and health care. Moreover, the delivery failure is very prominent in the supply and maintenance of infrastructure. As indicated by the author the lack of infrastructure is a significant constraint on economic growth. Moreover, the author provides an extensive exposition on a long list of good intentions in respect of infrastructure development but which do not come to fruition. In the final analysis it appears that the state has poor delivery capacity. The author proposed several solutions, particularly at the municipal level. It appears that as long as the ANC government is concentrating on establishing a developmental state we have little hope of achieving a capable state.
The trust deficit is not easily managed in a diverse society. As indicated in the text a low-trust condition imposes a tax on all forms of economic activity. The building and management of trust is an imperative in a country like South Africa.
The NDP proposed a “social compact” but it is probably easier said than done. The European experience with this form of social dialogue emphasises the importance of appropriate institutions that are lacking or under developed in this country. In this direction the proposed reform of NEDLAC by the author should be taken seriously.
Closely related to the social dialogue issues are those of similar nature raised in the chapter on the mixed economy. The exposition emphasises the importance of both government and business in the economy and the potential of mutual cooperation in addressing the six deficits outlined in this book. Moreover, as explained in the NDP, a mixed economy is dependent on a capable state. In the terminology of Parsons, we need a delivery state (p.133). The South African government is often quick to defend its interventionist policies with reference to the experience in South-East Asian countries without taking cognisance of the high delivery capacity of those governments. Following on this Parsons proposes a more extensive application of Regulatory Impact Assessment (RIA) in South Africa. As the author indicated, this assessment process has been applied globally since the 1980s. This method is well-known for its effectiveness in evaluating the outcome of regulatory proposals through a cost and benefit analysis. We support the application of such assessments. The South African government could, for instance, have saved itself the embarrassing developments and public revolt against metropolitan e-tolling, had it subjected this proposal to RIA scrutiny.
Zumanomics provides the reader with an objective analysis of the South African political economy. The analysis is presented within an ideological neutral framework. In this sense this book and the NDP are complementary. The book gives a clear and succinct exposition on the main reasons for the disappointing growth performance of this country. It discusses policy proposals and political constraints. The author presents a strong case for the implementation of the NDP as a holistic policy approach that will take the country towards a higher sustainable growth path. Although the NDP has already been accepted by cabinet the challenge lies in its successful implementation. The author correctly sees President Zuma as the champion of such a process. This could be President Zuma’s legacy. Time is running out for him and his party to secure such a position.