The Job Eating Developmental State Machine in SA

THE JOB EATING DEVELOPMENTAL STATE MACHINE: THE COSTS OF CENTRAL PLANNING IN SOUTH AFRICA

Joseph Stalin had a much easier job than Jacob Zuma does when it comes to central planning. Since the Plan, devised by ideologues and bureaucrats with no knowledge of business or industry, was by definition perfect, any failure of the plan could only mean deliberate sabotage by counter -revolutionaries. So the solution to the failure of the Plan was to shoot the saboteurs.

No such luck for Zuma, living as he does in a democracy with a battered but extant market based economy. Yet although the concepts that underlie central planning may have died with the collapse of the Soviet bloc, they live on, zombie like, at the southern tip of Africa.
The damage central planning causes to jobs is clear for all to see. The jury is well and truly in.

The South African economy over the last decade has underperformed the global average the developed world average, the undeveloped world average, and the Africa average. We sit with the highest recorded unemployment rate in the world.

There is a cost to central planning in South Africa, and nowhere is it more apparent than in the costs to the economy, and thus to jobs, through the chief implementation agencies of that planning, our State Owned Enterprises ( SOEs). They form the centrepiece of the "developmental state" that the Alliance ideologues fondly imagine exists so successfully in South Africa. Yet the cost of this is immense, and it is mounting. In the last four years alone to 2010, bailouts of SOEs cost the taxpayer R243 billion. Yes, billion.

Nor does it end there. Burdened by the cost of the unwanted King Shaka airport in KwaZulu Natal, the state agency the Airports Company of South Africa (ACSA), wants to recoup its losses with a 132% increase in airport taxes. Yet tourism lies at the heart of industrial policy in South Africa as a prime job creator. The SABC, playing interminable musical chairs with its incompetent leadership of deployed cadres, is an endless drain on state resources. And every household and small enterprise in South Africa strains under the costs of the annual hike in Eskom's charges of 25% plus. There is no money left for domestic savings, nor is there much room for consumption as these state monopolies leech on the SA economy.

All of this cost jobs. While South Africa was warbling on to investors about SA's "cheap" electricity, the state planners ignored the market signals of a looming crisis until the wheels literally fell off. It meant the end of another triumph of state planning, the Coega deep water harbour, which immediately lost a R2,5 billion investment by Rio Tinto Alcan - because alumnium smelters chew electricity.

Most recently, even as IPAP 2 targets "beneficiation", which basically means adding energy (heat via electricity) to heat raw ore, South Africa's only zinc smelter near Springs closed this year directly because of rapid electricity hikes. Yet the state planners continue to punt smelters as a solution to job creation in South Africa.

From 2005 to 2014, independent economist Mike Schussler reminds us, electricity prices based on already agreed upon tariffs, will have risen by 633%. What small plastics company, for instance, can factor that into its growth forecasts? Schussler estimates this alone will reduce SA GDP by 1% per year (Sunday Independent, 22/11/09).

Since 2009 power shortages have pulled the plug on an estimated R6 billion in new property and construction initiatives, says the Cement and Concrete Industry, while mining, a job mainstay in this economy, has also taken a hard knock.

In fact, it could be argued that it is this very developmental state, as conceptualised by government, which is the real and present danger to economic growth and the 5 million new jobs target.

Of course, this is not necessarily an argument in favour of a passive, minimalist state either. But if we examine where the developmental state has had successes, such as amongst some of the Far Eastern dragon economies, we quickly see that there is very little common ground between our fantasies of the developmental state and the developmental state in, for instance South Korea in the 1950s and 1960s. In an address to the Helen Suzman Foundation (Focus 2009), William Gumede provides a useful summary of the reasons for South Korea's developmental state succeeding. You don't need to be an economist to see what the problem is in South Africa.

The developmental state on South Korea had the following core characteristics;

1. A highly technocratic bureaucracy. In other words, a public service "with competent people".
2. A public service that drew on the whole country's talents, regardless of race or gender, drawing on the best skills available.
3. Clear policies with easily measurable targets towards their achievement.
4. A coalition in which business and labour are equal partners, with no political preferences given to either.
5. Decisive leadership. Without it, countries unwilling to make the hard decisions required tend to drift from policy to policy. As each policy fails, so it is replaced with a new policy, while in the real economy everything drifts.

These points also help explain why government's countercyclical public infrastructure investment of R785 billion continues to remain elusive (although there are some signs of life recently in the energy sector). Nor is this new. From 1995 to 2004, public sector investment in South Africa stagnated at 5% of GDP, way below the average of nasty capitalist economies. The "developmental" state lacks the capacity to implement development. It exists largely in the fantasy life of the Nzimandes and Patels of this world. Nor has it helped that the SOEs lacked for the most part the planning and execution skills, under a leadership appointed for political, not business reasons.

Nonetheless, amongst the COSATU and SACP leadership in the Alliance, the concept of the developmental state remains a central component of South Africa's march to the sunny uplands of the hoped for national democratic revolution. There is no modesty here, no sign of a fundamental rethink. So, as night follows day, the Growth and Economic Redistribution (GEAR) policy is followed by the Accelerated and Shared Growth Initiative of Economic Policy for South Africa (ASGISA), and the New Growth Path (NGP).

When expressed through the SOEs, these developmental state assumptions about redistribution and shared growth produce the kind of problems that are epitomised by Eskom. If they were not so richly rewarded it is even possible to feel some pity for the Eskom leadership of recent years, as they try and meet the contradictory demands of the developmental state proponents in South Africa. Thus Eskom's management was simultaneously supposed to run this monopoly as a profit making business venture on the one hand, and to provide "free" electricity and meet expensive social goals on the other. It was an impossible ask.

Much the same applies to Telkom, which even now holds a deathlike grip on the local loop unbundling which has seen much poorer countries such as Kenya roar past Africa's only industrialising economy in the provision of affordable broadband services. The cost in jobs forgone can be guessed at by the international experience, which shows that universal broadband access alone can add up to 1% per annum in GDP. Yet the state in this country willingly forgoes that opportunity for growth. Meanwhile rapid technological advances have allowed the cellphone industry to connect far more South Africans at an affordable rate than Telkom with all its billions in taxpayer subsidies can only dream of.

And under the SOE Transnet, the important port of Durban was this year awarded the honour of being both the most expensive and the most inefficient in the world. Yet the German economy (for instance) has recently been rescued from global recession in large part due to increased exports. And the rail bottlenecks that stop us (along with policy uncertainty) from exploiting the commodities booms, are too well known to need repeating here.

In sum, the "developmental state"as it currently exists in South Africa now has a track record of impressive failure . Ordinary South Africans in the real economy can't afford our ideologues or business as usual. It's time to learn the lessons and do things differently.

(Note: This article appeared as an op ed in Business Day, 11/11/11. It's conclusions about the developmental state were subsequently seperately endorsed in Minister Trevor Manuel's detailed National Development Plan (NDP))