Distrust between state and private sector is SA’s death knell

AFTER the previous week's cabinet meeting, minister in the presidency Khumbudzo Silence Ntshavheni gave feedback to the media. She made the astonishing claim that the private sector has an interest in the government collapsing.

In her words, the private sector “… engineer and do machinations to ensure that the government collapses”.  And, “that's why they also self-feed into the narrative that there is a collapsing state [and] there’s a collapsing economy, because that’s what they wish for”. Ntshavheni made this senseless claim in reference to British bank Standard Chartered's admission of collusion to manipulate the rand-dollar exchange rate, and payment of an administrative fine of R42.7 million.

She spoke in the same week that the Growth Through Inclusion in South Africa report led by Harvard's Growth Lab and the economist Ricardo Hausmann blamed exactly this ideological mistrust between the state and the economy for South Africa's economic decline. A few days after Ntshavheni's verdict, the president has still not said anything to contradict her, so perhaps we should assume that her opinion reflects the gist of the conversation in that cabinet meeting.

Considering the confirmed rumours of unease between Enoch Godongwana and his cabinet colleagues over the required austerity measures from the National Treasury, as well as the fact that the finance minister has suddenly gone quiet in the last two weeks, there is reason to believe we should take Ntshavheni more seriously than we would otherwise have done.

Without going into the merits of the minister's argument, one wonders what the ideological justification is for making statements that only further confirm the existing damage to the relationship of trust between the state and the private sector. Is it at all possible for the cabinet to generate the political insight that gives South Africa's economy a fair chance?

Hausmann has a working relationship with the South African government that spans decades. In 2004, he was approached by the then finance minister, Trevor Manuel, to put together a panel that could deliberate on South Africa's potential economic growth. The panel would report continuously to Manuel. Hausmann is the founder and director of Harvard's Growth Lab and holds the Rafik Hariri Professorship in the Practice of International Political Economy at the Harvard Kennedy School. This Venezuelan's motivation for working with Manuel is simple: “If South Africa can be successful, humanity has a real chance to meaningfully deal with its problems, especially because the country has not been dealt the best hand.”

The part of Hausmann's 2023 report that has made headlines in the past two weeks, and which has probably angered the ANC the most, is that BEE — or statutory black empowerment — and cadre deployment, alongside the power crisis, are the primary reasons for South Africa's deindustrialisation. The variables that lead to increasing inequality are therefore political rather than economic, according to Hausmann.

Chief Justice Raymond Zondo claimed in his findings on state capture that cadre deployment is probably unconstitutional, but according to Hausmann, BEE as it relates to cadre deployment introduces an unaffordability into the rules of economic activity. There is no reason why empowerment cannot stimulate economic growth through greater inclusion of more South Africans in the labour market, but the current model's most pertinent feature is the contribution it makes to growing inequality by monopolising wealth in elites with connections to the ANC. The theory is regularly preached by local economists and opposition parties, but it is important that an economist of Hausmann's stature points it out.

While there is moral justification for the need to empower by making the economy accessible to black South Africans, the ruling elite have abused empowerment in the economy's value and supply chains to intensify the impact of inequality. The process not only corrupts the state, it also corrupts that part of the private sector that is dependent on transformation.

“While democratic rights were extended to the totality of the population after the end of apartheid in 1991, extreme economic inequalities persisted and were exacerbated," says the report. Hausmann emphasises the value of political competition as a prerequisite for pragmatic economic policies. “The primary reason why some societies overcome their economic problems and others do not is the difference that competitive elections make."

Meaningful economic policy is therefore the result of competitive politics. In an established liberal-democratic system, the assumption can be made that if voters are alienated from the ability to survive economically due to bad policies, they will vote for a different political future. Hausmann argues that the absence of economic urgency within the ANC is related to the absence of political competition.

He points out that the party is indeed politically committed to the ideals of an extensive manufacturing sector through value addition. Yet the past two decades have produced a regressive deindustrialisation that has driven millions of people out of the formal economy. The rate at which the economy is deindustrialising, especially since the global economic crisis of 2008, has no international equal.

As far as Hausmann is concerned, this deindustrialisation is significantly due to the collapse of the country's capacity to generate electricity. The comparative advantage that South Africa had in international markets was largely dependent on the availability of reliable and affordable electricity. Data shows that South African value chains that are more dependent on electricity have all performed worse than other sectors of the economy over the past two decades as the availability of Eskom's product has declined.

The mining industry, agriculture and manufacturing have all come under unsustainable cost pressure over the past 15 years due to the cost of electricity, but more specifically due to load-shedding. Hausmann argues that if you quantify it, half of South Africa's economic degeneration can be attributed to Eskom's dysfunction.

The state's inability and apparent unwillingness to fully utilise South Africa's proven advantage in the mining industry is an ideological death knell for industrialisation and job creation. South Africa was the only mining economy that did not have the capacity to take advantage of the periodic upward thrust of international commodity prices. The main reason was the absence of a regulatory and legislative regime that would have encouraged value addition.

Hausmann makes a point that is confirmed by Ntshavheni's condescending misunderstanding of the private sector: “The ANC's ideological struggle with capital owners has manifested itself in hundreds of thousands of job losses in various sectors. South African mining companies have indeed invested in mining over the past two decades, but not in South African mines."

By the way, the minister expressed her dislike of the findings of the Harvard report as follows: “Research is not absolute because it considers a period or sample."

But the Growth Lab report makes an important point that the minister chooses to ignore: deindustrialisation is a by-product of disinvestment. And even if the electricity problem is solved, the mining industry and the manufacturing sector still do not have the logistics to get their products to market. As far as Hausmann is concerned, the tax losses of the 2022/23 fiscal year are the economic aftermath of self-inflicted policy crimes. He asks a valid question: “How is it possible that South Africa has been plagued by power outages for 15 years, and only in 2022 is permission granted to private capital owners to generate electricity for the national grid?"

The ANC's urgent need to continue to control the state is problematic and prevents the government from looking for pragmatic solutions to endemic economic problems. South African society has the knowledge, experience, skills and capital to make a significant difference, but the state monopolises the control systems to such an extent with ideology that these abilities and capacities cannot come to fruition in an atmosphere of mistrust.

South Africa is a democracy with regular elections and a functioning constitutional order. The economy is diverse and complex, like most successful competitive economies. However, these positive features become almost meaningless in the context of the extremely high levels of unemployment, poverty and alienation.

It is astonishing to think that something as seemingly normal as the appointment of officials by a ruling elite, and the necessity for morally justifiable empowerment, can be so destructive to the socioeconomic rights enshrined in our constitution. And it's not me who says this, Minister Ntshavheni, it's Ricardo Hausmann.

♦ VWB ♦

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