SA needs frank talk and a robust social compact

In the third part of this month’s New Frame, New Economy forum, economist Seán Mfundza Muller gives historical context to Michael Sachs’ analysis of the country’s fiscal position.

I agree with much of what Michael Sachs has argued. But some historical context is in order. South Africa finds itself in a situation that has been developing for a long time.

The 1990s was not a golden era. The seeds of the political rot reaped during Jacob Zuma’s presidency were sown in the first postapartheid decade through the arms deal and the smaller-scale, widespread co-opting of ANC politicians by vested interests – local and foreign, new and old – in ways that were legal and illegal.

The relationships that underpinned the success of Bosasa and the Watson family, implicated in breathtaking corruption by the confessions of its racist bagman Angelo Agrizzi, were developed and expanded in the 1990s. The Gupta family itself managed to establish relationships with Thabo Mbeki’s right-hand man Essop Pahad, as well as then-powerful ANC politicians such as Tokyo Sexwale, who was once seen as a possible presidential candidate. Painting the 1990s uncritically only gives succour to those who falsely claim that Zuma is merely a scapegoat.

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The importance of proper consideration of history applies also to economic and fiscal policy. The 1990s were characterised by the triumph of an approach to economic policy-making that was more aligned to the then-dominant Washington Consensus view than the historical policy stances of the ANC and its allies. Institutionally, the consequences of that triumph resulted in the National Treasury becoming arguably the most powerful institution in the postapartheid era. It has also been one of the most competent government departments, and its officials have sought to act in what they believe to be the public interest. But, thanks to its political protection, ideological certainty and relative competence within the state, the National Treasury became blinkered and arrogant.

The losing radicals dissipated into “civil society” from where they continued to make careers out of throwing stones at the National Treasury and claiming that if their proposals had been accepted the country would be better off – the joy of never having a policy implemented is that one is never proved wrong. Each grouping has spawned new generations, but the dynamics are not much different, nor are they much more helpful.

Austerity by stealth

The National Treasury’s blinkers have been exposed by the about-turns of organisations whose prescripts it often sought to follow. A notable example is the International Monetary Fund, which famously admitted austerity may not actually be a good idea after all – albeit shortly after enforcing it on Greece – and that inequality might be bad for growth.

There are other, more specific examples. One is the persistent notion that spending money on public servant salaries does not contribute to economic growth because it is “consumption” spending rather than “capital” spending. Most treasury officials are not foolish enough to use this framing now, but the broader attitude persists.

Sachs rightly notes that the planned expenditure reductions to be announced in the coming budget will negatively affect the number of public servants. But that has already been happening under the policy of fiscal consolidation adopted from around 2012 onwards, which, in some instances, amounted to austerity by stealth. 

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As I noted in a submission to Parliament in 2017: “It is important to recognise that in some sectors (including, but not limited to, health, education, defence and policing) reductions in expenditure ceilings may have led to ‘austerity by stealth’ in which national and provincial departments reduced posts in important service delivery areas.”

This is not new. In the 1990s salaries were being raised for some civil servants but the actual number of posts in a range of service delivery areas was being reduced or not kept up with population growth.

Specific policies have also been exposed as wrong or poorly substantiated. The bureaucratic cluster around the treasury, including most notably the Department of Planning, Monitoring and Evaluation, has trumpeted “evidence-based policy” and learning.

In practice, these bureaucrats often ignore evidence to push through preconceived, quasi-ideological policy interventions and maintain these interventions even when evidence repeatedly shows they are not achieving the desired objectives. One high-profile example is the (youth) employment tax incentive: neither the original evidence nor subsequent evidence provided adequate support for the policy but it was implemented, extended and expanded anyway. The primary beneficiaries appear to have been private-sector employers rather than the unemployed.

That policy was conceived in the Mbeki era, implemented and extended in the Zuma era, and expanded and further extended in the Cyril Ramaphosa era at significant cost to the fiscus – more historical continuity of the kind the country would be better off without.

Evidence-free implementation

In addition to the strengths Sachs discusses – such as pension fund assets and the Reserve Bank’s capacity to act as a lender of last resort – it is also important to note massive liabilities at Eskom and the Road Accident Fund, along with deterioration in the finances of local government that will be exacerbated by problems in the energy sector. The government is pushing ahead with a plan to “unbundle” Eskom.

Instead of prioritising solutions to the operational and financial crises that are in the public interest, the crises are being used as an opportunity to push through quasi-ideological agendas from the 1990s in service of vested interests.

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A similar process is unfolding in the transport sector, where the treasury appears to be putting pressure on Parliament to pass the Economic Regulation of Transport Bill, despite its basic logic being nonsensical. The bill will create a costly bureaucracy to engage in the same kind of price regulation the National Energy Regulator has so hopelessly failed at, when the vast majority of problems in the transport sector have nothing to do with price regulation.

This is not evidence-based policy but evidence-free implementation of a crude, and often incorrect, notion that “liberalisation” of markets necessarily leads to improved outcomes. These policies will expand the bloated aspects of the public service – creating more board positions in Eskom and dozens of regulatory bureaucrats – at the same time as frontline posts in areas such as education, healthcare and policing are cut.

These and many other examples demonstrate that the narrative cultivated in the business press, that finance minister Tito Mboweni simply needs to “push through unpopular structural reforms”, is incorrect and disingenuous. Many of the specific actions envisaged are misdirected or poorly substantiated.

Finding a way out requires an end to false talk

There is a line in Bob Dylan’s blues ballad All Along the Watchtower that goes: “Let us not talk falsely now, the hour is getting late.” For much of the Zuma presidency there was false talk. And, once the depths of state capture became clear, it felt like the hour was getting late.

While crucial progress has been made since 2018 in pushing back against the capture of the state, economic and fiscal policy has been misdirected and mediocre. Add to this the devastation of the Covid-19 pandemic, and the hour is now truly very late.

Those who wish for the country to have any hope of clawing itself out of this morass through a social compact need to be willing to engage in frank, rather than false, talk. Unfortunately, the necessary sincerity, competence and will appears absent among many of those from whom it is needed.

Seeraj Mohamed responds to Michael Sachs and presents a fiscal alternative:

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Duma Gqubule’s response to Michael Sachs unpacks President Cyril Ramaphosa’s “lie” and what the 2021 budget needs to achieve:

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Public finance specialist Zukiswa Kota discusses how fiscal policies can help fulfil human rights obligations:

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