South Africa’s terminal policy uncertainty

Policy and leadership uncertainty as the ANC disintegrates

 To his article South Africa’s national minimum wage could hurt small firms and rural workers senior lecturer in economics at Stellenbosch University  Dieter von Fintel said, “If we were required to know the certainties of economic policies, we would have to stop economic policy making altogether”.

But the claimed outcomes of the recently passed law implementing the minimum wage (MW) are uncertain and will not have the positive desired outcomes its supporters claim, using SA’s numerous ineffective policies and strategies over the past 20 years as examples.  Its supporters, including University of Witwatersrand’s Gilad Isaacs (here, here and here), are adamant it will reduce inequality and poverty and spur the economy by creating “spill over effects”. 

To be clear, concerning MW, Von Fintel said he and co-author Marlies Piek “are incredibly concerned about the potential rise in unemployment among small firm workers and in rural areas.  We believe this is the main group that will suffer. Other groups are certainly not as vulnerable, though some individuals may experience job loss”.  I thought their honesty in the face of overwhelming support for it – its fait accompli and will be implemented from May 2018 as national policy – rare and refreshing.

But my overriding concern and irritation about the minimum wage debate is also generally applied to discussions about SA’s economic policy course, i.e., the “reductionist and absolute certainty [and] unnecessary ideological and political tones and stridency” that prevents one having a “worthwhile discussion” about it, with a nod to the latest, “radical economic transformation”.

I summarise the argument I put to Von Fintel and Piek:

Poor economic growth, caused by structural defects in the economy, and resulting unemployment, poverty and inequality, are SA’s most significant social and economic problems. MW’s advocates say it will reduce inequality and poverty and help create growth.  But they don’t say how except it worked in countries like Russia, India, Indonesia and especially Brazil. 

If one interprets their argument correctly, they infer and hint increased wages will create increased consumer spending (never a good idea, but anyway) that, through the multiplier effect, creates economic growth.  This has not happened with the annual R120 billion that 17 million social grant beneficiaries receive and spend, so why should it with the marginal increase to minimum wages (R3 500 a month) for a only a sector of the workforce?  They don’t say.

And, once again, why are the existing unemployed millions (real rate 36%) ignored and excluded from any consideration regarding policies and proposals that aim to reduce poverty and inequality?  Should we not be creating conditions for growth and jobs for as many people as possible rather than once again protecting the working elite (note the minimum wage is the unions’ initiative)?

In a previous article about the minimum wage I said Brazil is not a good example.  Its economy is in trouble, with growth shrinking (2016: -4.1%) and unemployment rising (still a low 11.5%).  Productivity increases have not matched rising wages. The minimum wage-linked social, pensions and unemployment benefits rose dramatically, increasing national debt, which was 60% GDP in 2015. 

And importantly, notwithstanding Brazil’s and Russia’s current economic problems and negative growth since 2014, theirs, India’s and Indonesia’s economies are very different to SA’s.  Their long-term and current unemployment rates are significantly lower than SA’s 26.5% (2016).  Brazil’s is 11.5%, and the others below 6%.  From 2000 to 2014 Brazil, India and Russia experienced impressive GDP growth, and Indonesia a more moderate rate, compared to SA’s relatively flat rate. India achieved steady growth throughout and its GDP is now over $2 trillion.

Therefore, given these and other fundamental differences, policies that worked in those countries cannot be cut and pasted here and expected to achieve similar outcomes: it’s uncertain, and unlikely, MW will achieve a national reduction in poverty, inequality, never mind growth.

In his post-article reply, Von Fintel also stated inequality between employed workers is under-reported and greater than the inequality between workers and the unemployed, implying the former is the real cause of SA’s high inequality. However, the Gini coefficient (income per capita including salaries, wages and social grants) is a composite that takes the entire population – working and unemployed – into account, so I doubt his bald assertion without a clarifying explanation.

The World Bank’s South Africa Overview reports:

“Key development challenges: South Africa remains a dual economy with one of the highest inequality rates in the world, perpetuating inequality and exclusion. With an income Gini that ranges between 0.66 to 0.70 [2006: 0.72; 2009: 0.70; 2011: 0.69.  Poverty Trends in South Africa, Statistics SA, 2014], the top decile of the population accounts for 58% of the country’s income, while the bottom decile 0.5%, and the bottom half less than 8%.  This makes South Africa one of the most consistently unequal countries in the world.”

But why only consider those countries that imposed MW?  Why not use policies and strategies that are proven to create conditions for growth and employment wherever they may be found.  Why not look to succeeding developing countries – Vietnam, Singapore, South Korea, etc – where such strategies work, including those that don’t have MW?  Answer: because due to entrenched and often pernicious ideology, political reasons or confirmation bias – changing the facts to suit the desired outcome – they are deemed inconvenient and/or irrelevant.

Von Fintel is right to an extent that if we required policy outcomes to be certain we would stop making policy.  But there must be reasonable expectation that policies will produce expected or desired outcomes; that its formulation and objectives must be rational, clearly understood and fair.  Otherwise, what’s the point? 

But since the 1990s economic policy is a crap shoot, where the dice is rolled and the prevailing attitude is “I-don’t-know-the-outcome-but-hope-for-the-best”.  I wrote before that SA’s economic policy-making is mediocre, dazed and confused.   A senior government official once said they were “naive” about industrial policy that was, in fact, disastrous. This is still common.

We’ve had a dozen development strategies from the Reconstruction and Development Plan to the National Development Plan, the pinnacle, overarching national strategic plan that was supposed to put the country on the path to permanent growth and development. But SA’s leaders couldn’t get it together, and it’s been consigned to file 13 like all the others.

There’s no accountability.  No-one takes responsibility for the billions and lives wasted and opportunities lost.  Not the president and not the ruling party.   Not the unions and Union Buildings hangers-on – the unelected revolutionaries and highly paid advisors with their passé economic theories who have inordinate influence over SA’s economic policy.

And not the fawning, tenured academics who write so-called authoritative pieces about matters they’ve only read in a book that they’ve neither understood nor experienced. 

In place of subjecting proposed and de facto policies and strategies to sober risk analyses and econometric modelling, they – academics, professional analysts, government and their advisors – make unsupported pronouncements, or write articles in the popular media about their passion du jour, the latest hot-button topic.  Who cares if their arguments lack academic rigour or factual basis – they certainly don’t.  If they’re wrong their jobs, reputations and tenure prospects are not on the line.  And anyway, those ultimately affected – the unemployed, poor and taxpayers – are in no position to complain.   

In the absence of intellectual depth where it counts, i.e., at the top with our decision-makers, policy-making has been reduced to punters shouting the odds with catchy, significant-sounding but meaningless slogans like “radical economic transformation” and “take up arms”, which, when it comes to it, they can’t define or defend.

It would be easy to lay all the blame on President Jacob Zuma.  It started before him but achieved full, foul ripeness under him.  The ANC too is to blame, though, for having deliberately spurned opportunities to get rid of him. 

Now we’re witnessing the alliance’s messy disintegration.  And the country has entered a policy and leadership stasis, if not until the elective conference in December 2017, then elections in 2019, as it tries to pass the compacted, cancerous stool that is the ANC’s messy inner workings.  Until then uncertainty will continue.

Dieter von Fintel was right after all: we don’t require certainty; we’ve always muddled along, making a mess of it.