YONELA DIKO: SA's economic fate is in the ANC's hands

OPINION

In his fifth essay of The Federalist Papers, Alexander Hamilton, the first Treasury Secretary of the United States of America (US), thought leaving everything to the markets was like a "wild speculative paradox" that no other enlightened nation practiced in historical development.

Hamilton felt that developed countries with developed industries were a threat to the US's young economy in an open marketplace, particularly when those very industries were supported by their own countries' governments in their development. He felt that without government support and protection of the US industries, they would perpetually be at a disadvantage.

Hamilton went to work, building dams and bridges and skyscrapers, nationalising the war debt. His plan was to use the government's capital generation to build the economy, which would allow markets to play a more meaningful role. He was not willing to risk development of his country on the unreliable goodwill of the markets. He was also not willing to stake the founders' political capital on the whims of the markets.

Ultimately, Hamilton knew that the government support he gave to US industries was ultimately a political project.
Most developed economies have historically believed that government was the real and meaningful economic driver, with unmatched capacity to put together the capital injection needed to stimulate and sustain economies.

Today, however, these economies are highly developed and economically strong and are now encouraging ideas about purely market-driven development, exporting those beliefs across the world and entrenching them at universities and teaching students that only markets can generate the needed capital and economic stimulus for real development.

Two of London School of Economics rock stars debated these matters with even deeper passion - Frederick Von Hayek and John Maynard Keynes. Both believed in the power of the markets but fundamentally disagreed on who should lead development from a very low base. Hayek believed governments involvement in economic development, even during the devastating economic depression in the 1930s, was a huge error. In his view, government crowded out investments the private sector needed to stimulate the economy.

Keyes, on the other hand, believed that beyond a certain point of downturn, markets are incapable and even unwilling to come into the market and play, and this requires government to be the primary economic stimulator in the land. In the 1930s, Maynard Keynes made more sense and history proved him right. At the time, unemployment was at 30% in the US and over 15% in Europe, and this was the worst time in their economic history.

South Africa's unemployment has been sitting stubbornly at over 25% since at least 2004 and the market-driven economy has not delivered on jobs. In fact, as many people said, we had a jobless growth. Markets go where they will make money, not where they will develop the economy and create jobs. Hence today, we are dealing with the financialisation of the economies. We are unlikely to get mass employment from the markets alone.

Turning point

Today, all governments are encouraged to embark on reforms, fewer government-owned institutions, lower taxes and even lower regulation, less government involvement, overnight licenses to trade, and open season of financial movements across borders. What changed?

Everywhere you turn in South Africa, you are told about economic reforms. This means reducing the size of government and public wages, eliminating some regulations - particularly labor regulations to give business free rein - and to rid government of state-owned enterprises in order to give a more efficient and effective private sector space to provide such services.

This is said to be the key ingredient to elusive high economic growth in the country. Effectively, this will bring the missing private capital back into the marketplace and make space for more growth and jobs.

The markets have certainly contributed to a leap in wealth making and development but the road to where they actually matter is paved with government capital and wealth. It is in fact government that makes the market matter. No country has ever taken off from a very low base on the shoulders of the markets.

It is mischievous and misleading today for developed economies and their exported textbooks to claim their success is a product of the markets. The current level of development in the west and belief in the rhetoric that their original spring of wealth is from the markets is dishonest.

The United States, United Kingdom and even Asian countries such as Singapore, South Korea, Taiwan are today market driven, their wealth comes from a few decades before when they were led by dictators who ran state-owned companies and positioned their countries well for western government aid and government-led economic stimulation.

Growth of Asia

The 31-year rule of Singapore's authoritarian leader, Lee Kuan Yew, saw him criticised for labeling political opponents as communists and detaining them without due process. This clearly showed that unlike most of Africa and Latin America, who were non-aligned or with the Soviet Union, Singapore chose the US as an ally. The US made sure it rewarded those who sided with them during the Cold War.

In 1967, a full 15% of Singapore’s national income was a product of the US's military acquisition for the Vietnam war.

"Britain clung to its air and naval bases in Singapore for decades pumping $200 million annually into the Singapore economy to maintain its military installations on the island from 1967. These bases contributed 20% of Singapore’s national income, providing employment for 36,000 Singaporeans," writes Yale University post-doctoral fellow Wen-Qing Ngoei.

The US's role was no different: "In 1971, U.S. officials found in that American private investment in Singapore had begun to grow at a phenomenal $100 million a year."

All the niceties of meritocracy, open markets and open trade have not been the real economic ingredients for Asia's success.

All these countries chose to protect their industries by eliminating the market for corporate control. They eliminated workers' bargaining power and made their companies rich. It is after thriving that these economies relaxed regulations, not the other way round.

Today, China is doing the same thing. It is embarking on tight control of its markets, which has produced 20 years of uninterrupted economic growth. Since 2008, they have been the only country showing meaningful and real development. China also managed its money supply to promote its exports by devaluing its currency.

Conclusion

It is therefore clear that all developed countries only became purely market economies once they had become fully developed. These countries used many mechanism to force people to save, ensuring companies are protected from unions and given high profits. With free flowing markets, these countries today have the lowest capital accumulation.

Markets have always required initial government stimulation and have never on their own lifted any country into developed status.

The question with which the ANC has been confronted, since the late 90s but especially post the 2008 economic crisis, has been how to stimulate the economy and sustain it to produce jobs. The frustration about private investments, who have always preferred to sit on piles of cash instead of investing, has always been palpable. In 1999, then Finance Minister Trevor Manuel - who today might consider himself pro-markets - expressed this frustration when he said in a speech, "But sometimes we in government have to wonder whether our own businesspeople, our own citizens, believe enough in our country".

The ANC cannot continue to stake its political legitimacy, which depends on how the economy performs, on whether the private sector likes them enough to come and invest trillions of rands. The ANC must take its fate in its own hands.

Yonela Diko is the former spokesperson to the Minister of Human Settlements, Water and Sanitation. You can follow him on @yonela_diko.

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